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Yale  Insurance  Lectures 


BEING  THE  LECTURES  ON  FIRE  INSURANCE 
DELIVERED  IN  THE  INSURANCE  COURSE 
AT  YALE  UNIVERSITY 


Year  1903-4 


SPECIAL  EDITION 

FOR  THE 

HARTFORD  FIRE  INSURANCE  COMPANY 


THE  TUTTLE,  MOREHOU8E  & TAYLOR  PRESS 


Copyright,  1904 
By  Yale  Alumni  Weekly 


°l  (*5  * 

» Y X 

CONTENTS 


PAGE. 

Fire  Insurance — Its  Place  in  the  Financial  World — His- 
torical Notes.  Richard  M.  Bissell  . . .9 

Theory  of  Fire  Insurance — The  Nature  of  Contracts 

— General  Instructions.  Richard  M.  Bissell  . $7 

Organization  and  Methods — Different  Kinds  of  Mu- 
tuals— Taxation  of  Companies.  Richard  M.  Bissell  66 

Rates  and  Hazards.  Richard  M.  Bissell  . . .92 

Losses  and  Adjustments — Miscellaneous.  Richard  M. 

Bissell  .......  127 

Fire  Insurance  Engineering — Methods  of  Building  Con- 
struction for  the  Prevention  of  Fire  Losses.  H.  C. 
Henley  .......  155 


PREFACE 


The  lectures  on  Fire  Insurance,  contained  in  this  volume, 
were  delivered  at  Yale  University  and  constituted  one  section 
of  the  larger  course,  entitled  “Insurance,”  which  w'as  inaugu- 
rated there  during  the  year  1903-4.  These  lectures  were 
primarily  intended  to  serve  as  the  basis  of  an  elementary 
course  of  instruction  for  those  who  had  acquired  no  previous 
knowledge  of  the  subjects  treated  and,  therefore,  contain  much 
that,  to  experienced  underwriters,  will  serve  to  be  rudimen- 
tary. Furthermore  any  treatise  which  attempts,  in  so  brief 
a compass,  to  cover  such  a complex  and  technical  subject 
must  of  necessity  be  incomplete  and  is  to  be  considered  rather 
as  an  introduction  to  the  subject  than  as  a complete  text-book. 

Nevertheless  an  attempt  has  been  made  to  indicate  the 
broad  principles  upon  which  the  business  of  Fire  Insurance  is 
based,  and  to  briefly  outline  the  more  important  features  of 
history,  organization  and  practice  by  which  it  is  characterized. 

The  business  is  being  rapidly  specialized  and  there  are 
many  excellent  treatises  concerning  some  of  its  important 
departments,  which  are  readily  accessible  and  which  should 
be  consulted  by  those  who  desire  to  make  an  exhaustive  study. 


Fire  Insurance 


ITS  PLACE  IN  THE  FINANCIAL  WORLD 
HISTORICAL  NOTES 

BY  RICHARD  M.  BISSELL 

While  all  insurance,  properly  speaking,  partakes  of  the 
nature  of  indemnity,  the  peculiar  province  of  fire  insurance 
may  be  indicated  by  the  following  definition:  A fire  insur- 
ance policy  is  a contract  to  indemnify  the  holder  thereof  for 
actual  destruction,  by  a certain  immediate  cause,  namely  fire, 
of  value  appertaining  to  certain  specified  property  owned 
by  him.  Your  particular  attention  is  asked  to  this  statement, 
to  which  we  shall  return  in  a later  lecture. 

In  a broader  sense  fire  insurance  is  a tax — a tax  levied 
through  the  agency  of  insurance  companies  for  the  purpose 
of  distributing  over  the  entire  community  the  enormous  loss 
of  property  which  is  caused  each  year  by  fire  and,  by  this 
means,  of  avoiding  the  temporary  financial  paralysis  or  total 
ruin  which  would  result  therefrom  to  the  individuals  or  com- 
munities immediately  afflicted.  Doubtless  because  of  this  fact, 
it  is  that  fire  insurance  companies  and  their  business  are  so 
unpopular  with  many  people  and  especially  in  the  eyes  of 
law-makers.  The  tax  gatherer  has  never  been  highly  esteemed 
however  necessary  to  the  community  his  services  may  be. 

From  the  foregoing  it  will  be  seen  that  fire  insurance  is  not 
productive;  it  creates  nothing  and  its  benefits  as  to  the  com- 
munity at  large  are  all  indirect.  One  marked  difference  to  be 
noted  between  fire  and  life  insurance  is  this:  that  while  the 


IO  YALE  INSURANCE  LECTURES. 

premiums  paid  to  life  insurance  companies  are  some  day 
to  be  returned  to  the  policy-holder  or  his  beneficiaries,  the 
holder  of  a fire  insurance  policy  parts  absolutely  with  his 
premium  for  the  sake  of  protection  against  a possible  but 
by  no  means  inevitable  or  even  ordinary  misfortune.  And 
yet  fire  insurance  is  indirectly  a great  aid  to  business  and 
enterprise  of  every  description, — a necessary  conservator,  one 
of  the  principal  bases  of  credit,  and  a great  factor  in  the 
widely  extended  use  of  capital  which  characterizes  the  mercan- 
tile and  manufacturing  operations  of  our  day.  The  need  for 
fire  insurance  is  at  once  apparent  when  we  consider  the 
enormous  value  each  year  destroyed  by  fire  in  this  country 
alone,  the  average  amount  destroyed  for  the  past  ten  years 
being  nearly  $150,000,000  per  annum, — a sum  approximately 
equal  to  five-sixths  of  the  entire  amount  collected  by  the 
national  government  through  its  tariff  on  imports.  Yet,  as  Mr. 
A.  F.  Dean  remarks:  “While  there  have  been  few  presi- 
dential campaigns  in  which  the  tariff  question  has  not  occupied 
the  center  of  the  stage,  on  the  other  hand  the  fire  tax,  which 
amounts  to  equal  proportions,  is  practically  ignored,  not  only 
by  the  political  parties,  but  by  the  people  at  large.” 

The  amount  thus  destroyed  each  year  must  be  absolutely 
subtracted  from  the  country’s  wealth,  for  fire  insurance  does 
not  and  cannot  make  good  these  losses ; its  province  is  merely 
to  distribute  them.  As  Mr.  Dean  in  another  place  says:  “It 
is  true  that  when  a building  or  city  is  destroyed  fire  insurance 
makes  it  possible  to  create  another  building  or  city  in  its  place, 
but  the  fact  remains  that  something  has  disappeared  and  the 
world  is  permanently  impoverished  by  the  event;  but  the  loss 
escapes  the  attention  of  society  at  large  because  the  material 
thing  that  has  vanished  in  smoke  and  ashes  is  replaced  by 
tribute  gathered  from  the  four  corners  of  the  land.  The 
thing  that  has  vanished  forever  is  value,  i.  e.,  capital.  This 
insurance  cannot  replace.” 


YALE  INSURANCE  LECTURES.  II 

It  was  stated  above  that  fire  insurance  is  an  aid  to  business, 
a basis  of  credit  and  a factor  in  the  modern  widely  extended 
use  of  capital.  Let  us  consider  these  aspects  in  detail: 

First.  Insurance  aids  business.  This  follows  because  of  the 
security  and  permanency  which  are  assured  to  the  merchant 
or  manufacturer  by  his  insurance  policies.  Many  mercantile 
and  manufacturing  establishments  of  the  present  day  accu- 
mulate destructible  property  to  the  value  of  a million  or 
more  under  one  roof,  subject  to  total  destruction  at  any  time 
by  one  fire.  Without  the  protection  afforded  by  insurance 
policies  most  of  these  concerns  would  be  irretrievably  ruined 
by  such  a calamity  and  those  not  absolutely  ruined  would  be 
compelled  to  operate  in  a much  smaller  way  for  many  years. 
Should  such  a misfortune  come  to  a firm  properly  protected 
by  insurance  policies,  however,  the  property  loss  would  be 
made  up,  the  scope  of  their  business  would  not  require  to  be 
diminished,  and  so  far  as  their  success  was  dependent  on 
the  preservation  of  their  property  the  permanency  of  their 
business  would  be  assured.  These  considerations  apply  with 
equal  force  to  the  small  operator. 

Second.  Insurance  is  a basis  of  credit.  Capitalists  do  not 
hesitate  to  loan  money  on  buildings  which  are  subject  to 
destruction  by  fire  when  such  buildings  are  protected  by 
approved  insurance.  In  most  cases  it  is  provided  in  the  loan 
contract  that  insurance  payable  to  the  loaner  shall  be  car- 
ried. Without  such  a provision  money  cannot  be  borrowed 
on  real  property  beyond  the  value  of  the  land  itself. 

Again,  in  mercantile  or  manufacturing  business  a dealer 
may  purchase  goods  or  a manufacturer  sell  on  three  or  six 
months’  time  or  even  longer.  Why?  Because  the  seller 
knows  that  the  property  so  purchased  will  be  protected  by  in- 
surance, so  that  if  it  is  destroyed  by  fire  the  purchaser,  i.  e., 
the  debtor,  will  be  able  to  pay  his  debts.  Wholesale  dealers 


12 


YALE  INSURANCE  LECTURES. 


and  manufacturers  watch  this  matter  very  closely.  They  will 
not  ordinarily  sell  on  credit  to  a tradesman  who  does  not 
insure  his  stock,  and  when  a fire  occurs,  damaging  or  destroy- 
ing the  property  of  merchants  or  manufacturers,  it  is  quite 
common  for  the  creditors  to  step  in  between  the  property 
owner  and  the  insurance  companies  and  by  legal  process  com- 
pel the  payment  of  the  debt  out  of  the  funds  due  from  the 
insurance  companies.  In  Canada  it  is  a very  common  practice 
for  small  merchants  to  arrange  with  the  companies  when 
taking  out  insurance  that,  in  event  of  loss,  payment  shall  be 
first  made  to  their  creditors. 

Similarly  a large  portion  of  the  business  of  banks  consists 
of  advances  to  merchants  and  manufacturers,  but  banks  who 
are  trustees  for  their  depositors  could  not  afford  to  loan  to 
men  who  were  liable  to  ruin  by  fire  at  any  time.  They  may, 
however,  and  do  safely  loan  to  men  whose  credit  is  assured 
by  the  protection  afforded  by  insurance. 

Third.  Insurance  adds  greatly  to  the  extension  of  enter- 
prise. A man  whose  total  wealth  was  $100,000  and  who 
desired  to  go  into  a mercantile  or  manufacturing  business, 
would  hesitate  to  invest  the  whole  of  that  amount  in  his 
business  were  he  liable  to  lose  it  all  beyond  recovery  by  fire. 
Under  such  circumstances  he  would  dare  to  invest  only  a 
portion  of  his  capital  in  active  business,  keeping  the  balance 
as  a reserve  for  emergencies.  But  if  he  is  protected  against 
loss  by  fire  insurance  he  may  wisely  do  business  on  the 
largest  scale  which  his  financial  strength  will  permit ; he  may 
even  borrow  additional  sums  over  and  above  his  own  capital 
to  extend  his  business,  knowing  that  in  the  event  of  the 
destruction  of  his  property  the  loss  will  be  made  up  to  him 
from  the  funds  of  the  insurance  companies.  Thus  the  activity 
and  usefulness  of  capital  are  greatly  enhanced,  vast  enterprises 
are  undertaken,  and  the  idle  reserve  funds  of  the  mercantile 
community  are  reduced  to  very  small  proportions. 


YALE  INSURANCE  LECTURES. 


13 


Communities  too  are  conserved  and  protected  by  insurance. 
The  great  fire  of  London  came  at  a time  when  there  was  no 
insurance,  and  as  a result  the  city  was  crippled  for  many 
years  and  recovered  only  after  enormous  effort  from  the  blow 
which  it  had  sustained.  “If  we  compare  the  slow  recovery 
of  London  from  its  great  fire,  with  the  wonderful  reproduc- 
tion of  Chicago  and  the  substantial  and  rapid  restoration  of 
Boston,  can  we  doubt  that  the  great  recuperative  power  of 
both  cities  was  largely  due  to  their  insurance  indemnity,  and 
that  without  it  they  might  still  be  struggling  to  attain  the 
prosperity  which  they  reached  within  three  months  after 
their  destruction?”* 

Fire  insurance  has  been  likened  to  the  balance  wheel  of  an 
engine,  which  creates  no  power,  operates  no  part  of  the 
machinery,  but  nevertheless  insures  its  regular  rythmic  motion 
under  varying  strains  and  takes  up  the  shock  occasioned  by 
the  breaking  of  any  minor  part,  which  otherwise  might  result 
in  shattering  the  entire  engine. 

Fire  insurance  as  now  commonly  practiced  is  usually  con- 
sidered to  have  begun  after  the  great  conflagration  of  Lon- 
don in  1666.  While  marine  insurance — the  oldest  form  of 
insurance  in  existence  — had  been  steadily  developing  and 
extending  with  the  great  expansion  of  trade  and  navigation 
which  followed  the  discovery  of  the  New  World,  and  although 
merchants  and  ship  owners  from  very  remote  times  clearly 
foresaw  and  provided  against  the  perils  of  navigation,  very 
little  specific  attempt  was  made  by  property  owners  to  secure 
indemnity  for  loss  caused  by  fire  prior  to  the  date  above 
mentioned. 

It  is  true  that  some  forms  of  provision  for  the  aid  of  those 
suffering  from  loss  by  fire  and  other  calamitous  causes  appar- 
ently existed  in  very  remote  times,  as  the  following  quota- 
tion will  evidence : 


* F.  C.  Moore,  “ Fire  Insurance.” 


*4 


YALE  INSURANCE  LECTURES. 


“The  earliest  application  of  fire  insurance  known  to  us  was 
in  connection  with  communes  of  towns  and  districts.  These 
communes  flourished  in  Assyria  and  the  East  more  than  2,500 
years  ago.  Judges,  priests  and  magistrates  were  appointed 
for  each  town  and  district  with  power  to  levy  contributions 
from  each  member  of  the  commune  to  provide  a fund  against 
sudden  calamities  such  as  drought  and  fire.  If  the  judges 
were  satisfied  that  the  fire  was  accidental  they  empowered  the 
magistrates  to  assess  the  members  of  the  commune  either  in 
kind  or  in  money,  and  in  the  event  of  any  member  being 
unable  through  poverty  to  meet  his  share  of  the  contribution, 
the  deficiency  was  made  up  from  the  common  fund.  These 
communes  still  exist  in  a modified  form  in  China.” 

As  early  as  1240  A.  D.  the  laws  of  Count  Thomas  of 
Flanders  provided  that  the  members  of  a community  as  a 
whole  should  make  good  a loss  which  fire  might  cause  to  an 
individual  unless  the  incendiary  who  caused  the  fire  could 
be  discovered,  in  which  case  the  loss  was  to  be  made  good 
from  his  property  and  he  was  to  be  banished. 

It  will  be  noted  that  the  plans  outlined  above  contemplated 
an  assessment  by  the  state  and  that  all  property  owners 
were  protected.  We  may  discover  here,  therefore,  the  begin- 
ning of  state  fire  insurance,  which  will  be  later  more  fully 
described  and  which  continues  in  Germany  and  elsewhere  to 
this  day  on  a large  scale. 

Another  method  for  protection  and  security  against  loss  by 
fire,  water,  robbery  or  other  calamities,  arose  during  the 
Middle  Ages  in  connection  with  the  various  Anglo-Saxon 
and  German  guilds,  the  members  of  which  made  regular  con- 
tributions toward  a common  relief  fund. 

In  1609  a plan  was  suggested  by  one  of  his  subjects  to  Count 
Von  Oldenberg,  wherein  it  was  proposed  that  he  individually 
should  consent  to  insure  those  of  his  subjects,  who  might 


YALE  INSURANCE  LECTURES. 


15 


so  desire,  against  the  loss  of  their  houses  by  fire  upon  an 
annual  payment  to  him  of  a fee  or  premium  of  one  dollar  for 
every  one  hundred  dollars  of  valuation.  This  suggestion  was 
declined  by  the  Count,  though  not  without  some  hesitation, 
and,  though  he  suggested  that  such  a plan  might  well  be 
undertaken  by  a company  of  private  individuals,  no  action 
on  his  suggestion  seems  to  have  been  taken.  This,  so  far 
as  I have  been  able  to  discover,  was  the  first  suggestion  ever 
made  looking  toward  the  formation  of  a company  or  associa- 
tion for  fire  insurance  purposes  only. 

In  England  various  fire  insurance  schemes  were  proposed 
in  1635,  1638  and  1660,  but  for  one  reason  or  another — largely 
owing  to  the  great  Civil  War — none  of  them  was  fully  organ- 
ized, and  as  late  as  1667  there  is  evidence  that  fire  insurance 
as  we  know  it  did  not  exist. 

In  1666  came  the  great  fire  of  London,  which  burned  for 
four  days  and  nights  and  spread  over  436  acres  of  territory. 
This  was  an  alarming  and  appalling  calamity.  Over  85  per 
cent,  of  the  buildings  in  London  were  destroyed,  while  the 
property  loss  is  estimated  to  have  been  about  ten  million 
pounds, — a sum  which  has  been  calculated  to  equal  over 
three  hundred  million  dollars  at  present  values.  In  the 
absence  of  insurance  this  was  a blow  from  which  London  was 
slow  to  recover,  as  is  shown  by  the  fact  that  in  1673,  seven 
years  later,  about  one  thousand  buildings  were  yet  to  be 
replaced.  Relatively,  this  London  fire  was  the  greatest  in  the 
history  of  the  world,  and  the  date  of  it — September  2d — was 
observed  as  a Fast  Day  for  more  than  one  hundred  years 
thereafter. 

Immediately  after  the  fire  various  plans  for  the  protection 
of  individuals  against  loss  by  fire  began  to  be  devised.  In 
1667  the  first  regular  system  for  insuring  buildings  against 
fire  began.  In  that  year,  one  Nicholas  Barbon  opened  an 


1 6 


YALE  INSURANCE  LECTURES. 


office  where  he  individually  proposed  to  insure  houses  and 
buildings.  A few  years  later,  in  1680,  after  having  had  some 
success,  he  formed  a partnership  known  as  'The  Fire  Office.” 
This  company,  for  a given  consideration,  engaged  to  pay  the 
assured  the  amount  of  indemnity  declared  in  the  policy,  or 
contract,  should  his  house  or  building  be  destroyed  by  fire, 
or  to  repair  it  should  it  be  only  "damnified” — i.  e.,  damaged. 
No  liability,  it  will  be  noted,  rested  upon  the  assured  beyond 
the  payment  of  the  premium. 

In  1681,  a few  years  after  this  first  company  was  established, 
an  attempt  was  made  by  the  City  of  London  to  establish  an 
insurance  account,  or  business,  and  funds  and  property  were 
put  aside  and  dedicated  for  that  purpose.  Houses  were  in- 
sured for  any  term  up  to  one  hundred  years.  But  the  enter- 
prise did  not  prosper  and  was  abandoned  in  1683. 

Then  followed,  in  the  same  year,  what  was  called  the 
"Friendly  Society.”  This  concern,  which  had  an  existence  of 
nearly  one  hundred  years,  conducted  its  business  upon  an 
entirely  different  plan,  as  follows : First,  the  assured  paid 
yearly  a small  sum,  varying  according  as  the  building  to  be 
insured  was  brick  or  frame.  This  charge  was  to  cover  the 
expenses  and,  we  may  presume,  the  profits  of  those  who 
operated  the  company.  Second,  the  assured  deposited  with 
the  company  a sum  equal  to  five  annual  payments  as  a guar- 
antee that  future  payments  and  assessments  would  be  met  as 
required.  This  money  could  be  appropriated  by  the  company 
if  the  assured  failed  to  keep  up  his  payments.  Third,  the 
assured  signed  an  agreement  to  contribute  his  share  toward 
the  payment  of  any  and  every  loss  which  the  company  might 
sustain  up  to  an  amount  not  exceeding  thirty  shillings  for 
every  one  hundred  pounds  of  insurance  carried  by  him.  It 
will  be  seen  that  all  losses  were  to  be  paid  from  the  con- 
tribution of  the  assured,  upon  whom,  also,  rested  all  liability 


YALE  INSURANCE  LECTURES. 


17 


and  for  whom  the  operators  of  the  company  or  the  “under- 
takers,” as  they  were  termed,  acted  only  as  collectors  and 
distributors. 

This  was  a form  of  mutual  insurance,  as  it  is  now  called; 
that  is  to  say,  insurance  where  the  policy-holders  are  directly 
liable  for  one  another’s  losses.  This  company  was  also  fairly 
successful. 

Another  purely  mutual  company  was  organized  in  1696. 
This  company  proposed  a deposit  to  be  paid  back,  less  expenses, 
when  contracts  should  terminate ; also  that  profits  from  inter- 
est on  invested  funds  over  and  above  losses  and  expenses 
should  be  divided  among  the  members  or  policy-holders,  and 
that  each  year  a rate  of  assessment  should  be  declared  by  the 
directors,  according  to  which  levies  should  be  made  on  the 
policy-holders  for  payment  of  losses  or  for  the  distribution 
of  profits  to  them.  It  was  assumed  that  the  interest  or  earn- 
ings from  the  accumulated  deposits  would  pay  all  losses,  and 
this  seems  to  have  been  the  case,  for  the  company  prospered 
and  grew  and  is  in  existence  to-day,  having  greatly  developed 
in  size  and  scope  and  being  the  oldest  insurance  company  in 
existence.  Its  operations  are  limited  to  London  and  its 
suburbs.  The  original  title  of  this  company  was  “Contribu- 
tors for  Insuring  Houses,  Chambers  or  Rooms  from  Loss  by 
Fire  by  Amicable  Contribution.”  This  was  afterward  changed 
to  “Amicable  Contributionship,”  and  in  1776  the  name  of 
“Hand  in  Hand” — taken  from  an  emblem  used  by  the  company 
in  marking  and  designating  buildings  which  it  insured — was 
adopted. 

The  companies  heretofore  mentioned  all  confined  their 
operations  to  buildings  and  mostly  to  dwellings  only,  but  the 
need  for  insurance  upon  goods  and  stocks  of  merchandise  was 
very  great.  About  1706,  one  Charles  Povey  opened  an  office 
for  insuring  such  property  in  London.  He  was  without  back- 
2 


i8 


YALE  INSURANCE  LECTURES. 


ing  or  support  of  any  kind  and  furnished  merely  his  promise 
to  pay  in  event  of  loss.  This  venture  was  apparently  greeted 
with  ridicule  and  the  proposal  to  insure  personal  property 
seems  to  have  been  commonly  considered  impractical.  Never- 
theless Povey  persisted  and  soon  began  another  enterprise 
designed  to  insure  personal  property  throughout  Great  Britain 
and  Ireland,  but  finding  his  first  venture  unprofitable  devised 
the  scheme  (which  would  seem  to  be  quite  in  accord  with 
some  very  modern  methods  of  corporate  finance)  of  organiz- 
ing a third  institution  to  take  over  the  other  two.  This  was 
accomplished.  The  new  concern  was  at  first  called  the  “Lon- 
don Insurers,”  but  almost  immediately  after  its  formal  in- 
augury in  1710  it  adopted  the  name  of  the  Sun  Fire  Office,  and 
under  this  name  began  its  successful  career  which  still  endures, 
making  that  office  the  oldest  non-mutual  company  in  existence 
as  well  as  the  first  company  which  ever  undertook  the  insur- 
ance of  movables  or  personal  property.  It  has  continued  to 
be  a partnership,  i.  e.,  not  a corporation,  and  is  almost  unique 
among  insurance  companies  in  that  respect.  The  first  con- 
tracts of  the  Sun  provided  for  payment  of  losses  out  of  a 
reserve  to  be  made  up  of  one-half  the  premiums  paid,  the 
liability  of  the  company  ceasing  when  that  reserve  should  be 
exhausted.  Later  the  company,  doubtless  under  stress  of  com- 
petition, made  its  promise  to  pay  absolute,  and  in  1726  a capi- 
tal fund  of  48,000  pounds  was  created  as  additional  security 
for  policy-holders. 

Another  curious  feature  of  the  contracts  made  by  this  first 
company  doing  general  business  was  the  proviso  that  in  case 
of  loss  5 per  cent,  should  be  deducted  from  claims  for  defray- 
ing the  expense  of  the  company’s  officers  in  investigating  and 
settling  the  loss.  This  was  reduced  to  3 per  cent,  in  1716,  and 
abandoned  altogether  not  later  than  1794.  This  feature  seems 
to  have  been  quite  common  among  insurance  companies  dur- 


YALE  INSURANCE  LECTURES. 


*9 


in g the  early  history  of  the  business,  but  was  too  obviously 
open  to  objection  and  criticism  to  endure  after  serious  com- 
petition arose. 

Between  1710  and  1720  numerous  insurance  schemes  were 
launched,  modeled  after  one  or  the  other  of  those  described 
above.  Some  succeeded;  more  failed  or  were  wound  up.  In 
1720  the  first  chartered  companies  or  corporations  made  their 
appearance.  In  that  year  two  companies — the  Royal  Exchange 
Assurance  Company  and  the  London  Assurance  Corporation 
— were  granted  charters,  first  to  do  a marine  insurance  busi- 
ness, and  in  the  following  year  to  also  transact  fire  and  life 
insurance  business.  This  date  then,  1720,  marks  the  advent 
of  modern  stock  companies  in  fire  insurance.  One  of  the  first 
announcements,  or  “broadsides”  (as  such  notices  were  then 
styled)  of  the  Royal  Exchange  Assurance  contains  the  fol- 
lowing as  one  of  the  arguments  which  should  persuade 
insurers  to  patronize  it  rather  than  the  mutual  association  or 
contributionships  theretofore  doing  most  of  the  business: 
“For  the  security  of  all  persons  insured  by  this  Corpora- 
tion, their  capital  stock  or  fund  is  by  their  charter  established 
and  made  liable  and  shall  always  be  ready  to  pay  and  make 
good  to  the  assured  the  amount  of  all  losses  by  fire.” 

Later  in  the  same  paper  appeared  the  following: 

“And  whereas  persons  assured  by  other  societies  not  incor- 
porated, are  subject  to  calls  in  case  of  a loss  or  a deduction 
out  of  the  money  due  to  the  sufferer,  those  that  are  assured 
by  this  Corporation  are  not  liable  to  any  calls  (i.  e.,  assess- 
ments), or  deductions  whatsoever.” 

These  considerations — namely,  freedom  from  all  personal 
liability  on  the  part  of  the  assured  beyond  payment  of  a 
fixed  premium  and  the  fact  that  in  the  case  of  stock  com- 
panies their  entire  capital  stock  and  accumulated  funds  are 
pledged  to  the  payment  of  losses — have  no  doubt  chiefly  caused 


20 


YALE  INSURANCE  LECTURES. 


the  commercial  world  to  favor  stock  companies  or  corpora- 
tions up  to  this  date,  when  such  companies  do  a very  large 
proportion  of  all  the  fire  insurance  business,  the  figures  for 
1902  in  the  United  States  being  approximately: 

Premiums  taken  by  stock  companies $202,000,000 

Premiums  taken  by  mutual  companies...  22,000,000 

In  other  words,  the  stock  companies  receive  about  90  per  cent, 
of  the  entire  amount  of  premiums  collected. 

This  may  be  said  to  bring  the  history  of  fire  insurance  in 
Great  Britain  down  to  modern  times.  During  the  last  three- 
quarters  of  the  eighteenth  century  fire  insurance  companies, 
both  mutual  and  stock,  but  chiefly  the  latter,  were  organized 
in  very  considerable  numbers  and  for  the  most  part  copied  the 
methods,  contracts  and  practices  of  the  earlier  companies. 
Many  of  these  companies  still  survive;  indeed,  some  of  the 
largest  English  companies  in  existence  date  from  that  period. 

The  early  histories  of  these  first  ventures  in  fire  insurance 
contain  much  curious  and  interesting  matter,  but  time  and 
space  do  not  permit  a study  of  their  plans  and  methods.  One 
feature  of  their  early  operation,  however,  has  developed  to 
such  great  proportions  and  has  become  of  such  great  import- 
ance as  to  demand  mention  here,  namely,  the  protection  of 
property  against  fire.  It  was  a natural  and  immediate  out- 
come of  the  first  attempt  at  fire  insurance  by  Nicholas  Bar- 
bon  that  his  interest  in  fires  and  their  prevention  should  be 
greatly  augmented.  Accordingly  his  and  the  other  early  offices 
devised  metal  house  plates  to  be  securely  fastened  to  those 
buildings  which  might  be  covered  by  their  policies,  and  then 
hired  men  and  provided  some  simple  apparatus  for  extin- 
guishing the  fires  which  might  arise  in  or  near  the  buildings 
so  marked.  These  house  plates  were  also  considered  as  a 
mark  of  acceptance  and  assumption  of  liability  by  the  com- 


YALE  INSURANCE  LECTURES.  2 1 

panies.  Some  offices  even  stipulated  that  liability  should  not 
begin  until  their  plate  had  been  affixed  to  the  building  which 
the  policy  was  to  cover.  This  it  was  thought  tended  to  hinder 
fraud  and  prevent  disputes.  Moreover,  because  they  brought 
a building  under  the  protection  of  the  company’s  firemen  and 
because  they  evidenced  to  the  public  the  fact  that  the  property 
owner  would  not  be  ruined  by  fire,  these  plates  were  esteemed 
as  desirable  and  valuable  by  policy-holders.  They  became 
in  fact  a sort  of  basis  of  credit,  and  the  custom  of  using 
these  plates  endured,  especially  in  smaller  places,  long  after 
their  original  use  had  disappeared.  In  fact,  such  plates  are 
used  in  some  foreign  countries  to-day.  In  America  their  use 
was  very  common  until  about  twenty-five  years  ago ; they  may 
still  be  seen  over  the  door  of  many  New  England  homes 
and  are  not  yet  entirely  obsolete  among  the  farmers  in  some 
sections  of  the  country. 

The  ordinary  method  of  preventing  the  spread  of  fire  at  that 
period  seems  to  have  been  by  blowing  up  buildings  by  gun- 
powder, and  this  work  was  commonly  done  by  the  artillery  or 
Royal  Gunners.  The  early  insurance  companies  used  also 
bucket  brigades  and  hand-pumping  engines.  Each  company 
had  its  own  liveried  firemen,  who  were  expected  to  guard 
its  interests.  Later  some  of  the  companies  organized  corps 
of  watchmen  and  patrolmen  who  should  discover  fires  in 
their  incipiency,  give  the  alarm  and  summon  the  firemen  of 
the  company  for  whom  they  worked.  Still  later,  when  the 
practice  of  insuring  personal  property  began,  it  was  found 
advisable  by  the  Sun  office — the  first,  it  will  be  remembered, 
to  transact  that  class  of  business — to  provide  a body  of  men 
for  the  purpose  of  removing  insured  goods  from  burning 
buildings  and  for  protecting  them  when  so  removed  from 
thieves  and  pilferers.  As  companies  multiplied,  so  did  their 
private  fire  and  salvage  corps  increase  in  number,  until  in 


22 


YALE  INSURANCE  LECTURES. 


1808  fifty  fire  engines  were  kept  up  by  the  companies  in  Lon- 
don alone.  In  1825  a number  of  these  companies  consolidated 
their  fire  brigades.  In  1833  all  were  united,  but  not  till  1866 
was  the  establishment  turned  over  to  the  city.  It  seems  very 
strange  that  private  corporations  should  have  so  long  been 
allowed  to  control  and  direct  this  important  branch  of  civic 
administration. 

Inasmuch  as  modern  fire  insurance  had  its  genesis  and  early 
development  in  Great  Britain,  whence  also  American  ideas 
and  practices  were  derived,  we  have  devoted  most  of  our 
limited  time  to  the  early  history  of  the  business  there  and 
can  give  but  slight  and  incidental  attention  to  the  subject 
in  other  foreign  countries.  This  course  has  seemed  to  be 
proper,  not  only  for  the  reason  just  mentioned,  but  because 
English  fire  insurance  companies  have  developed  more  rapidly 
and,  following  the  track  of  English  ships  and  commerce,  have 
carried  their  operations  throughout  the  world  to  a far  greater 
extent  than  the  companies  of  any  other  country.  There  is  no 
quarter  of  the  globe  where  fire  insurance  may  not  be  obtained 
from  English  offices.  The  insurance  companies  of  other  coun- 
tries for  the  most  part  confine  their  operations  to  their  own 
country,  with  the  exception  perhaps  of  Germany,  the  com- 
panies of  which  country  have  in  later  years  also  embarked  in 
the  world-wide  business. 

In  the  various  kingdoms  and  provinces  which  now  consti- 
tute the  German  Empire,  as  has  been  mentioned  before,  the 
various  communal  guilds  had  provided  some  crude  form  of 
insurance  for  their  members,  and  in  many  places  this  function 
was  transferred  to  the  various  municipalities  as  the  guilds  dis- 
appeared. One  writer  describes  this  process  as  follows:  “As 
the  absolute  monarchical  police-state  constitutes  the  bridge 
between  the  middle  ages  and  modern  times,  so  too  the  transi- 
tion from  the  mediaeval  guild  plan  of  mutual  help  to  the 


YALE  INSURANCE  LECTURES. 


23 


modern  system  was  bridged  by  state  insurance.  The  guilds 
of  the  middle  ages  lost  their  importance  and  private  indus- 
try was  not  rapid  enough  to  supply  the  void  left  by  them, 
and  so  the  state  was  forced  to  step  into  the  breach.”* 

Such  public  fire  insurance  outside  of  Germany  is  still  to  be 
found  in  German-Austria,  Denmark,  Switzerland  and  Scandi- 
navia. At  a comparatively  recent  date  about  40  per  cent,  of  the 
outstanding  insurance  in  Germany  was  carried  by  the  institu- 
tions conducted  by  the  government  or  by  various  municipalities. 
Thoughout  Germany  and  Switzerland  to-day  all  buildings  of 
ordinary  occupancy  are  assured  by  the  government  as  soon 
as  built.  Each  owner  is  assessed  pro  rata,  according  to  the 
appraised  value  of  his  own  insured  buildings,  for  the  losses 
within  the  state.  Money  payments  are  not  made  by  the  state 
in  event  of  loss,  but  the  damage  is  repaired  or  the  building 
replaced  by  the  government.  The  necessity  for  insurance  on 
other  classes  of  property  than  buildings  caused  the  formation 
of  the  first  stock  company  in  Germany  in  1812,  since  which 
time  many  companies,  both  stock  and  mutual,  have  arisen, 
also  various  local  associations  similar  to  the  old  guilds  and 
perhaps  descendants  from  them. 

In  France,  while  various  insurance  companies  were  set  on 
foot  during  the  second  and  third  quarters  of  the  eighteenth 
century,  all  perished  during  the  general  financial  collapse  which 
accompanied  the  French  Revolution.  The  first  regular  stock 
company  organized  thereafter  seems  to  date  from  1818. 

In  other  European  countries  fire  insurance  seems  to  have 
had  even  a later  development — thus  in  Austria  the  first  stock 
company  was  organized  in  1822,  and  the  first  mutual  company 
in  1825.  In  Russia  the  first  company  appeared  in  1827. 

In  all  civilized  countries  there  are  now  fire  insurance  com- 
panies, even  in  China. 

* J.  S.  Bloomingston,  Ph.D.,  “ Fire  Insurance.” 


24 


YALE  INSURANCE  LECTURES. 


Methods  and  plans  vary  in  different  parts  of  Europe.  In 
France,  under  the  Code  Napoleon,  every  individual  is  liable 
for  loss  or  damage  which  may  happen  to  others  through  his 
fault.  In  case  of  fire  the  law  holds  that  the  fault  rests  with 
the  tenant  or  owner  on  whose  premises  the  fire  originates, 
unless  he  can  prove  himself  without  fault;  in  other  words, 
the  burden  of  proof  is  on  him.  Hence  a tenant,  for  example, 
takes  out  insurance  first  on  his  own  personal  property;  sec- 
ond, to  protect  him  against  possible  claims  to  be  made  by  his 
landlord,  and  third,  to  protect  him  against  possible  liability  to 
his  neighbors  for  damages  resulting  from  fires  attributable  or 
attributed  to  his  carelessness  or  negligence.  It  would  be 
highly  instructive  to  more  completely  compare  the  varying 
conditions  and  methods  under  and  by  means  of  which  the 
business  of  fire  insurance  is  conducted  in  different  parts  of 
the  world,  but  we  cannot  attempt  it  here. 

In  the  city  of  Philadelphia,  where  fire  insurance  was  first 
practiced  in  this  country,  there  were  in  1752  seven  fire  com- 
panies with  two  hundred  and  twenty-five  members,  seven 
engines,  thirty-six  ladders  and  ten  hundred  and  fifty-five 
buckets.  Yet  despite  the  frequent  fires  which  were  responsi- 
ble for  the  organization  of  these  companies,  no  method  of 
safe-guarding  individual  interests  by  means  of  fire  insurance 
seems  to  have  existed.  It  is  a curious  fact,  worth  noting,  in 
passing,  that  until  1870  Philadelphia  was  dependent  upon 
private  organizations  for  the  extinction  of  fires.  The  volun- 
teer fire  companies  were  succeeded  by  a paid  fire  department 
in  that  year. 

On  April  13,  1752,  certain  subscribers  or  contributors,  among 
whom  was  Benjamin  Franklin,  organized  under  a deed  of 
settlement  the  “Philadelphia  Contributionship”  for  the  in- 
surance of  houses  from  loss  by  fire.  The  first  policy  was 
issued  June  1st  of  that  year.  This  institution  was  closely 


YALE  INSURANCE  LECTURES. 


25 


modeled  after  the  English  contributionships,  and  even  adopted 
the  house  badge  of  one  of  the  leading  English  societies.  Its 
early  contracts  provided  for  a fixed  deposit  from  every  assured, 
according  to  the  amount  of  insurance  carried  and  the  nature 
of  the  building  insured. 

Policies  were  issued  for  seven  years,  and  the  theory  was  that 
the  interest  on  the  accumulated  funds  would  pay  for  losses 
and  expenses,  so  that  at  the  expiration  of  seven  years  the  de- 
posit could  be  returned  intact  to  the  assured.  Nevertheless, 
the  deposit  itself  was  liable  for  the  payment  of  losses  and 
expenses  should  the  income  from  investments  prove  to  be 
insufficient.  No  liability  seems  to  have  been  incurred  by 
the  contributors  beyond  the  amount  of  the  deposit  and  provi- 
sion was  made  in  case  of  overwhelming  conflagration  for  a 
pro  rata  division  of  the  assets  as  a complete  liquidation  of 
claims.  When  the  interest  earnings  exceeded  the  losses  and 
expenses,  a dividend  was  to  be  allowed  to  contributprs. 

As  the  institution  gained  experience  it  was  found  necessary 
to  abandon  the  division  of  profits,  which,  after  March,  1763, 
were  allowed  to  accumulate,  thus  forming  a permanent  fund 
for  the  payment  of  losses  and  expenses. 

“Such/’  to  quote  the  historian  Fowler,  “was  the  first 
enunciation  in  America  of  the  great  principle  of  insurance- 
accumulation,”  for  it  will  be  remembered  the  original  plan 
did  not  contemplate  a permanent  fund.  On  the  contrary, 
the  deposits  and  surplus  income  derived  therefrom,  if  any 
after  payment  of  losses  and  expenses,  were  all  to  be  returned 
to  the  contributors. 

The  company  survived  the  trials  of  the  Revolutionary  War, 
including  the  financial  stringency  and  depreciated  currency 
which  resulted  therefrom,  and  has  continued  to  exist  and 
prosper  to  the  present  day.  In  1902  its  interest  and  dividends, 
wisely  invested,  had  accumulated  to  the  amount  of  over  four 


26 


YALE  INSURANCE  LECTURES. 


millions  of  dollars.  It  still  continues  to  insure  only  brick 
buildings,  and  its  insurance  transactions  to-day  are  very 
limited,  the  income  during  the  past  year  from  this  source 
being  but  $11,000.  It  now  issues  exclusively  what  are  known 
as  perpetual  policies,  which  will  be  later  described. 

A curious  event  in  the  history  of  this  company  was  respon- 
sible for  the  second  and  similar  company  in  Philadelphia. 
Possibly  because,  as  was  claimed,  the  house  of  a contributor 
was  set  on  fire  by  an  adjacent  shade  tree  but  more  probably 
because  of  the  difficulties  experienced  in  throwing  water  on 
or  placing  ladders  against  houses  closely -surrounded  by  trees, 
the  society  in  1782  resolved  to  thereafter  prohibit  the  insur- 
ance of  houses  “having  a tree  or  trees  planted  before  them.,, 
Indeed,  this  hazard  was  for  a time  considered  to  be  so  serious 
that  a law  forbidding  the  planting  of  shade  trees  in  streets 
and  lanes  and  providing  for  the  removal  of  those  already 
so  planted  was  passed  by  the  Pennsylvania  Legislature.  This 
law,  however,  did  not  last  but  a year.  As  a result  of  this 
prohibition  a new  company  was  organized  by  “a  great  num- 
ber of  citizens  of  Philadelphia,  who  . . . have  found  it  con- 
venient and  agreeable  to  them  to  have  trees  planted  in  the 
streets  before  their  houses.”  The  new  company  was  modeled 

very  closely  after  the  senior  organization  except  that  an  extra 

* 

deposit  was  required  for  insuring  houses  having  trees  planted 
adjacent  to  them.  It  was  called  the  Mutual  Assurance  Com- 
pany for  insuring  houses  from  loss  by  fire,  though  it  was 
commonly  called  “The  Green  Tree”  from  the  house  mark 
which  it  adopted.  It  also  had  a prosperous  career,  which  still 
endures. 

Other  mutual  companies  and  contributionships  were  organ- 
ized in  New  York  in  1787;  in  Maryland  in  1794;  in  Vir- 
ginia and  Connecticut  in  1794,  and  in  Massachusetts  in  1795, — 
several  of  which  still  exist. 


YALE  INSURANCE  LECTURES. 


27 


So  far  as  can  be  ascertained,  the  first  fire  insurance  policies 
issued  in  America,  other  than  those  of  the  mutual  companies, 
were  issued  in  Hartford,  Connecticut,  in  1794,  by  a firm  styled 
Sanford  & Wadsworth,  on  behalf  of  what  seems  to  have  been 
a partnership  or  voluntary  association,  called  the  Hartford 
Fire  Insurance  Company.  This  company  issued  contracts  of 
indemnity  for  a fixed  premium,  with  no  liability  on  the  part 
of  the  insured,  and  counted  among  its  members  some  of  the 
wealthiest  and  most  prominent  citizens  of  the  State.  Two 
policies  of  this  company  are  still  extant.  Little  is  known  of 
its  history.  None  of  its  records  are  preserved,  but  the  fact 
that  the  names  of  several  of  the  original  partners  appear  as 
subscribers  to  the  capital  stock  of  the  incorporated  stock 
company  now  known  as  The  Hartford  Fire  Insurance  Com- 
pany, which  was  incorporated  in  1810,  would  seem  to  indicate 
that  the  latter  was  an  outgrowth  of  the  original  partnership. 

In  1794,  also,  the  first  incorporated  stock  company  made  its 
appearance.  It  was  called  The  Insurance  Company  of  North 
America,  and,  in  addition  to  marine  business,  for  the  transac- 
tion of  which  it  was  chiefly  organized,  soon  took  up  the 
business  of  fire  insurance.  The  same  company  also  issued 
the  first  policies  insuring  merchandise  in  America  in  the  same 
year,  1794.  This  company  still  exists  after  a long,  honorable, 
and  successful  career,  and  still  continues  to  be  an  important 
factor  in  both  fire  and  marine  insurance  affairs. 

Another  Philadelphia  stock  company,  The  Insurance  Com- 
pany of  the  State  of  Pennsylvania,  was  also  organized  in  1794. 

In  all,  about  ten  mutual  and  four  stock  companies  and 
partnerships  transacted  business  in  the  United  States  prior 
to  1800.  In  1820  there  were  seventeen  stock  companies  in 
New  York  City  alone,  six  in  Pennsylvania,  two  in  Connecticut, 
one  in  Rhode  Island,  one  in  New  Jersey,  and  one  in  Massa- 
chusetts, of  which  twelve  still  continue  in  business,  viz.,  five 


28 


YALE  INSURANCE  LECTURES. 


in  Pennsylvania,  two  in  New  York,  two  in  Connecticut,  and 
one  each  in  New  Jersey,  Massachusetts  and  Rhode  Island. 

The  first  foreign  company  to  do  business  in  America  was 
the  Phoenix  Fire  Insurance  Company  of  London,  in  1806, 
followed  in  1807  by  the  Pelican  Fire  Insurance  Company  of 
London. 

Almost  immediately  efforts  were  made  to  prohibit  by  law 
the  operation  of  foreign  companies,  and,  after  several  attempts, 
laws  were  passed  in  New  York  State  and  in  Pennsylvania  in 
1810  and  1814,  respectively,  forbidding  such  companies  to 
transact  business.  However,  after  the  conflagration  of  1835, 
the  dearth  of  insurance  capital  brought  about  the  repeal  of 
these  laws.  Nor  have  foreign  companies  since  that  time  been 
seriously  molested. 

The  data  and  experience  tables  by  means  of  which  the  busi- 
ness of  fire  insurance  might  be  wisely  conducted,  are  very 
imperfect  to  this  day.  At  the  beginning  of  the  nineteenth 
century  and  during  the  early  part  of  it,  they  were  practically 
non-existent,  and,  as  has  been  well  said,  the  business  was 
purely  an  empiricism.  Forms  of  contracts  were  copied  from 
those  in  use  abroad  and  rates  of  premium  were  also  frequently 
so  copied,  but  more  often  were  based  upon  crude  assumptions 
concerning  the  hazards  inherent  to  the  construction,  occu- 
pancy, or  exposure  of  the  buildings  insured.  The  fact  that 
shade  trees  were  considered  to  create  an  almost  prohibitive 
“jeopardy,”  while  the  liability  on  buildings  with  such  danger- 
ous occupants  as  distillers  was  assumed  at  very  low  rates  of 
premium,  is  an  indication  how  blindly  the  early  insurers 
groped  for  proper  rules  or  methods.  Little  or  no  attention 
was  paid  to  the  amounts  which  any  particular  company  might 
properly  carry  on  a single  risk  or  in  a given  area.  It  is  true 
an  advance  in  the  rate  of  premium  was  sometimes  made,  when 
large  amounts  of  insurance  were  desired,  but  the  law  of 


YALE  INSURANCE  LECTURES. 


29 


average  and  the  necessity  for  a proper  distribution  of  liability 
were  subjects  of  little  or  no  concern  to  the  companies  that 
first  undertook  to  furnish  indemnity  for  loss  by  fire  in  this 
country.  In  some  cases  practically  the  entire  assets  of  a 
company  were  risked  in  one  contract,  and  it  was  common 
to  put  out  single  policies  for  amounts  far  in  excess  of  the 
annual  income  of  the  company  issuing  them.  It  followed, 
as  a matter  of  course,  that  the  early  history  of  the  business 
was  full  of  vicissitudes,  surprises  and  disasters,  and  the 
persistency  of  some  of  the  older  companies  under  such  condi- 
tions is  not  the  least  noteworthy  fact  of  their  early  history. 
It  was  but  a natural  and  inevitable  result  of  such  conditions 
that  every  brief  period  of  success  should  be  followed  by 
reckless  competition  for  business.  Since  company  officials 
had  little  or  no  knowledge  of  the  fire  cost  of  any  class,  the 
danger  of  low  prices  was  not  apparent.  These  conditions,  it 
may  be  said  in  passing,  have  not  been  to  this  day  by  any 
means  wholly  cured,  as  will  be  seen  later.  Moreover,  the  fact 
that  fire  insurance  contracts  are  almost  always  made  for 
comparatively  short  terms — in  the  great  majority  of  cases  for 
one  year — has  always  tended  and  still  tends  to  encourage 
reckless  underwriting.  Companies  frequently  take  on  busi- 
ness at  rates  known  to  be  inadequate,  and  excuse  such  action 
to  themselves  by  the  assumption  that  the  contracts  so  obtained 
will  be  renewed  at  expiration  at  adequate  rates — an  assump- 
tion by  no  means  always  justified  by  facts. 

Early  in  the  century,  the  Insurance  Company  of  North 
America  began  to  extend  its  business  to  wider  fields  and, 
indeed,  as  early  as  1807  the  President  was  authorized  “to  ap- 
point suitable  and  trusty  persons  at  such  places  as  he  shall 
think  advisable,  to  act  as  surveyors  and  agents  of  the  com- 
pany.” Accordingly,  agents  were  promptly  appointed  in  Penn- 
sylvania, New  Jersey,  Ohio,  Tennessee,  Kentucky  and  else- 


3° 


YALE  INSURANCE  LECTURES. 


where.  This  was  probably  the  beginning  of  the  American 
system  of  fire  insurance  through  agencies,  which  has  grown 
to  enormous  proportions;  to  such  an  extent,  in  fact,  that 
there  is  hardly  a town,  village  or  hamlet  in  the  United  States 
so  small  that  some  agent  or  solicitor  of  a fire  insurance 
company  cannot  be  found  in  it. 

The  agency  system  brought  about  competition  among  com- 
panies of  different  States,  which  caused  in  Pennsylvania  the 
passage  of  a law  in  1829  prohibiting  all  companies  of  other 
States  from  doing  business  therein.  Outside  companies, 
however,  were  re-admitted  in  1849,  and  other  States  did  not 
take  similar  restrictive  action. 

Concerning  the  volume  of  business  transacted,  the  number 
of  companies  operating,  and  the  general  results  attending  the 
business  of  fire  insurance  in  the  United  States  prior  to  1850, 
there  is  little  reliable  or  exact  information  available. 

By  1835  there  were  twenty-six  local  stock  companies  in 
New  York  City,  besides  others  located  at  interior  points 
and  a considerable  number  in  other  States ; also  a large 
number  of  mutual  companies  doing,  for  the  most  part,  a 
purely  local  business.  In  December  of  that  year  came  the 
first  great  conflagration  and  destroyed  property  to  the  value 
of  twenty  million  dollars  in  New  York  City.  Of  the  twrenty- 
six  local  companies,  all  but  three  were  bankrupted;  also  a 
large  proportion  of  the  companies  from  other  States  doing 
business  in  New  York.  Two  results  followed  from  this 
fire:  first,  people  distrusted  the  local  companies  with  their 
congested  liability;  second,  capital  could  not  readily  be  found 
to  start  new  stock  companies,  hence  people  looked  to  mutual 
associations  for  protection  and  many  such  were  formed  and 
took  on  large  liabilities  in  the  city.  But  in  1845  another  con- 
flagration occurred  in  New  York  which  destroyed,  virtually, 
all  the  mutuals  doing  any  considerable  business  in  the  city 


YALE  INSURANCE  LECTURES.  3 1 

and  a large  proportion  of  the  re-organized  or  new  stock  com- 
panies. The  necessity  for  the  broad  and  stable  foundation 
afforded  by  a widely  distributed  liability  had  not  yet  been 
learned. 

The  business  of  fire  insurance  as  a whole  was  greatly  de- 
moralized by  these  and  subsequent  smaller  conflagrations  in 
Pittsburg,  Philadelphia  and  St.  Louis,  and,  in  the  absence  of 
proper  regulating  laws,  became  the  favorite  field  for  the 
exploits  of  deliberate  swindlers  and  visionary  gamesters. 
So  that  for  some  years  after  1845  vast  numbers  of  irre- 
sponsible concerns,  short-lived  for  the  most  part,  flourished 
and  failed;  while  the  few  older  surviving  stock  companies, 
though  sorely  beset  at  times,  gradually  secured  a firmer  hold 
of  the  business  of  the  country  and  extended  their  agencies 
throughout  the  United  States.  Gradually,  too,  more  favorable 
conditions  as  to  fires  in  New  York  City  obtaining,  local 
stock  and  State  mutual  companies  sprang  up  there  and  flour- 
ished. The  first  New  York  State  Official  Report,  issued  in  1853, 
shows  sixty-five  New  York  State  stock  companies;  seventy- 
four  New  York  State  mutual  companies;  twenty-two  stock 
companies  of  other  States,  seven  mutual  companies  of  other 
States,  and  three  foreign  companies,  all  doing  business  in 
New  York.  By  this  time  local  stock  and  mutual  companies 
had  been  organized  in  all  parts  of  the  United  States. 

The  Civil  War  at  first  depressed  the  business  of  insurance, 
with  all  other  business,  but  during  the  period  of  inflation 
which  followed  and  despite  the  warning  of  a ten  million 
dollar  conflagration  in  1866  at  Portland,  Maine,  by  which 
many  companies  were  ruined  or  temporarily  disabled,  the 
business  was  pursued  under  conditions  of  reckless  competi- 
tion, and  companies  were  organized  in  great  numbers.  It  is 
said  that  nearly  four  hundred  charters  were  taken  out  in  the 
years  1866  to  1869  inclusive. 


32 


YALE  INSURANCE  LECTURES. 


In  October,  1871,  came  the  great  Chicago  fire,  which  en- 
dured three  days,  and  destroyed  property  variously  estimated 
to  be  worth  from  one  hundred  and  twenty-five  to  one  hun- 
dred and  sixty-five  millions.  By  this  fire  sixty-eight  com- 
panies were  ruined.  The  losses  incurred  by  insurance  com- 
panies amounted  to  $91,300,000,  of  which  about  52  per  cent., 
or  $50,100,000  was  paid,  leaving  the  balance  of  $41,000,000, 
which  the  sixty-eight  bankrupt  companies  were  unable  to  make 
good  and  which,  therefore,  fell  on  property  owners,  who  also 
had  to  bear  the  loss  of  property  worth  about  $60,000,000,  not 
covered  by  insurance  of  any  kind.  The  unwisdom  of  relying 
upon  the  promises  of  indemnity  offered  by  companies  doing 
business  in  a restricted  field  is  shown  by  the  fact  that,  of 
twenty-two  Illinois  companies,  seventeen  were  put  out  of 
existence  by  this  fire  and  Illinois  companies  as  a whole  paid 
but  15  per  cent,  of  their  losses.  At  the  same  time  more  than 
fifty  Eastern  companies  paid  the  entire  amount  of  their  losses, 
as  did  the  six  foreign  companies  who  were  at  that  time  oper- 
ating in  the  United  States.  Nearly  one-third  of  the  entire 
amount  of  insurance  in  the  burnt  district  of  Chicago  was 
carried  by  Illinois  companies,  very  few  of  which  transacted 
a widely  distributed  business. 

Hardly  had  the  surviving  companies  collected  from  their 
stockholders  the  assessments  made  necessary  by  the  Chicago 
fire,  when,  one  year  later,  occurred  the  Boston  conflagration, 
which  caused  claims  of  $56,000,000  more  to  be  made  upon 
them.  Fifty  companies  were  bankrupted  by  this  fire,  includ- 
ing twenty-two  Massachusetts  companies. 

Since  1872  there  have  been  no  conflagrations  which  have 
seriously  affected  any  considerable  number  of  companies,  and, 
owing  largely  to  the  knowledge  born  of  the  bitter  experiences 
of  those  two  disastrous  years  and  to  a steadily  growing  appre- 
ciation of  the  fundamental  principles  of  underwriting,  con- 


YALE  INSURANCE  LECTURES. 


33 


ditions  as  to  stability  and  strength  sufficient  to  meet  sudden 
abnormal  demands  have,  on  the  whole,  greatly  improved. 

It  is  true  there  are  still  a very  large  number  of  weak 
companies  and  every  period  of  prosperity  witnesses  the  appear- 
ance of  a large  number  of  new  enterprises,  most  of  which 
do  not  survive  the  inevitable  period  of  unprofitableness  which 
follows.  Ruinous,  widespread  competition  in  prices  has  been 
avoided,  though  scattered  disturbances  are  of  constant  occur- 
rence, as  must  always  be  the  case,  no  doubt,  in  a business 
where  to  the  ordinary  and  severe  competition  of  well  ordered 
and  fairly  conservative  companies  is,  in  every  season  of  pros- 
perity, added  the  unreasonable  and  unintelligent  competition 
of  the  temporary  companies  just  mentioned,  and  where  the 
natural  competitive  tendency  toward  the  shading  of  adequate 
prices  is  stimulated  by  the  efforts  of  legislators  and  the 
public,  who,  because  they  believe  the  rates  charged  by  fire 
insurance  companies  to  be  arbitrarily  fixed,  instead  of  infal- 
libly controlled  by  the  rate  at  which  property  is  destroyed 
by  fire,  endeavor  to  prevent  all  efforts  looking  toward  the 
establishment  and  maintenance  of  rates  proper  and  necessary 
alike  for  the  protection  of  insured  property  owners  and  stock- 
holders of  insurance  companies.  Nevertheless,  the  business 
to-day  is  characterized  by  a solidity  of  assets,  strength  of 
reserve,  distribution  of  liability  and  widely  scattered  sources 
of  income  never  before  known  in  its  history,  and  each  year 
the  companies  successfully  meet  demands  for  losses  larger 
than  those  made  by  the  conflagrations  of  Chicago  and  Boston. 
For  instance,  in  the  year  1902,  insurance  companies  paid  losses 
amounting  to  nearly  three  times  those  paid  in  settlement  of 
claims  arising  from  the  great  Chicago  fire. 

The  rapid  and  enormous  accumulation  of  wealth,  largely 
invested  in  destructible  property,  and  the  tremendous  fire 
waste,  which  has  made  comparatively  high  rates  necessary, 
3 


34 


YALE  INSURANCE  LECTURES. 


have  combined  to  make  the  United  States  easily  the  world’s 
leader  in  the  volume  of  premiums  annually  collected  and  in 
the  number  and  variety  of  institutions  which  compete  for  the 
business.  The  volume  of  business  transacted  by  insurance 
companies  has  kept  pace  with  the  material  and  commercial 
growth  of  the  country.  Early  statistics  are  not  available,  but 
from  i860  the  results  of  the  business  of  the  stock  companies 
reporting  to  the  Insurance  Department  of  the  State  of  New 
York,  and  these  may  fairly  be  held  to  include  all  companies 
except  those  doing  a purely  local  business,  have  been  carefully 
tabulated  and  show  the  following  results : 


Year.  No.  of  Cos.  Assets.  Amount  at  Risk.  Premiums.  Losses. 

i860 132  $44,272,196  $1,379,818,274  $13,407,701  $8,460,469 

1870 173  94,869,589  4,509,617,329  43,237,521  25,619,430 

1880 153  145,619,359  7,102,706,955  53,899,092  29,772,356 

1890 148  222,478,122  I3i558,569,954  105,255,417  58,h7,399 

1902 145  34°,397,4l8  23,287,035,900  196,246,018  94,176,592 


The  business,  as  a whole,  has  probably  been  done  at  a loss, 
the  failures  far  exceeding  the  successes  in  number.  As  above 
stated,  the  records  of  the  first  half  of  the  century  are  incom- 
plete. The  following  quotation  from  the  Report  of  a Com- 
mittee of  Underwriters  who  were  appointed  partly  for  the 
purpose  of  investigating  the  results  of  business  in  1850,  may 
be  taken  as  being  the  most  reliable  statement  of  results 
obtainable : 

“The  statistics  of  fire  insurance  in  the  United  States 
will  show  that  in  the  period  of  twenty  years,  commencing 
with  1811  and  ending  with  1830,  it  did  not  produce  an  aver- 
age profit  of  3 per  cent,  per  annum  on  the  capital  employed. 

“The  business  in  the  twenty  years,  commencing  with  1831 
and  ending  with  1850,  exhibits  a very  discouraging  result. 
The  whole  of  the  premiums  received  for  the  insurance  of 
property  in  the  United  States,  and  in  the  provinces  of  British 


YALE  INSURANCE  LECTURES. 


35 


North  America  during  this  period,  and  many  millions  of 
capital,  were  required  to  meet  the  losses.  Many  of  the  stock 
companies,  and  nearly  all  of  the  mutual  companies,  were 
ruined. 

“The  whole  of  the  premiums  received  in  Western  New 
York,  and  in  the  Northwestern  and  Southwestern  States, 
in  the  last  ten  years  have  not  paid  the  losses  by  25  per  cent.” 

From  i860  to  1902  the  record  has  been  as  follows : 

Premiums $3,225,241,531 

Losses 1,898,907,094 

Expenses 1,199,473,333 

from  which  it  will  be  seen  that  losses  and  expenses  have 
amounted  to  58.87  per  cent,  and  35.12  per  cent.,  respectively,  of 
the  premium  receipts,  leaving  an  apparent  profit  of  6 per  cent. 
However,  from  this  must  be  deducted  the  outstanding  lia- 
bilities of  companies  as  of  December  31,  1902,  amounting  to 
$176,765,002,  so  that  the  net  result  indicates  an  apparent  profit 
of  $16,749,490,  or  about  one-half  of  1 per  cent,  on  the  total 
premium  income. 

The  above  figures,  however,  are  complete  as  to  surviving 
and  existing  companies  only.  If  to  their  record  could  be 
added  the  completed  figures  of  the  companies  who  have  failed 
or  retired,  the  results  of  whose  business  are  not  now  obtain- 
able, the  final  accounting  would  be  even  less  favorable.  The 
total  number  of  stock  companies — American  and  foreign — now 
doing  business  and  reporting  to  the  New  York  State  Insurance 
Department,  is  one  hundred  and  forty-five.  There  have  been, 
however,  in  the  history  of  the  business  in  the  United  States 
over  sixteen  hundred  companies  which  have  failed  or  retired, 
and  of  these  companies  about  nine  hundred  were  stock  com- 
panies. 


36 


YALE  INSURANCE  LECTURES. 


The  amount  of  liability  carried  by  fire  insurance  companies 
is  enormous,  exceeding  that  carried  by  the  life  insurance 
companies.  The  assets  and  income  of  fire  insurance  com- 
panies, however,  are  disproportionately  small  when  compared 
with  the  figures  of  the  life  insurance  companies. 

This  is  because,  first,  the  average  premium  collected  by  fire 
insurance  companies  is  very  much  smaller  than  that  col- 
lected by  life  insurance  companies.  Second,  because  fire  in- 
surance companies  must  accumulate  reserves,  not  for  a pay- 
ment to  be  made  under  every  contract,  but — as  experience 
shows — to  only  one  out  of  thirty  policy-holders,  and  then,  on 
the  average,  only  for  a part  of  the  amount  insured. 


Theory  of  Fire  Insurance 


THE  NA  TUR E OF  CONTRACTS— GENERAL 

INSTRUCTIONS 

BY  RICHARD  M.  BISSELL 

The  whole  theory  of  fire  insurance  is  logically  derived  from 
the  axiom  that  insurance  is  a means  of  providing  indemnity 
for  loss.  In  the  preceding  lecture  this  principle  as  applied 
to  the  operations  of  fire  insurance  was  illustrated  as  follows: 

“A  fire  insurance  policy  is  a contract  to  indemnify  the 
holder  thereof  for  actual  destruction,  by  a certain  immediate 
cause,  i.  e.,  fire,  of  value  appertaining  to  certain  specified  prop- 
erty owned  by  him.,, 

The  first  thing  to  be  noticed  is  that  indemnity  for  actual 
loss  sustained  is  the  measure  and  limit  of  the  duty  or  obliga- 
tion of  the  insurance  company,  hence  under  no  circumstances 
should  the  payments  made  by  the  company  exceed  such  actual 
loss ; that  is,  insurance  should  lead  to  no  profit  to  the  insured. 
A policy  is,  therefore,  a limited  contract,  the  limit  being  the 
actual  loss  sustained  by  the  policy-holder,  and  is  not  properly 
a promise  to  pay  a certain  sum  in  the  event  of  the  destruction 
of  the  property  insured.  Failure  to  comprehend  this  basic 
principle  is  responsible  for  many  of  the  misunderstandings 
which  arise  between  companies  and  their  patrons.  At  first 
sight  nothing  seems  more  reasonable  or  proper  than  that  an 
insured  should  receive  the  full  amount  upon  which  he  has 
paid  a premium  if  his  insured  property  is  totally  destroyed. 
The  earliest  contracts,  indeed,  provided  that  total  payment 
should  be  made  under  such  circumstances. 


3» 


YALE  INSURANCE  LECTURES. 


As  a matter  of  fact  many  causes  may  operate  to  decrease 
or  increase  the  actual  value  of  property. 

Where  personal  property  is  concerned  the  case  is  simple. 
Every  one  knows  that  stocks  of  merchandise,  for  instance,  are 
constantly  varying  in  value  as  goods  are  bought  and  sold, 
and  while  skilful  merchants  endeavor  to  keep  some  fairly 
constant  ratio  between  the  value  of  their  goods  and  the 
amount  of  insurance  they  carry  on  same,  yet  this  ratio 
unavoidably  varies,  and  it  very  frequently  happens  when  fire 
occurs  that  the  amount  of  insurance  is  found  to  be  larger 
than  the  value  of  the  property  covered.  Furthermore,  there 
are  a great  number  of  merchants  and  manufacturers  who  do 
not  keep  their  books  and  accounts  in  such  a way  as  to  actually 
set  forth  the  value  of  what  they  may  have  on  hand  at  a 
given  time.  The  science  of  expert  accounting  has  made  great 
strides  in  this  country  within  the  past  few  years,  but  accurate 
and  scientific  inventories  and  records  are  by  no  means  uni- 
versal, hence,  frequently,  the  careful  investigations,  which  are 
a part  of  every  loss  settlement,  reveal  a condition  of  affairs 
as  to  values  and  quantities  which  are  quite  unexpected  by  the 
property  owner.  People  commonly  recognize  this  possibility 
of  over-insurance  where  personal  property  is  concerned. 
Though  attempts  have  been  made  in  several  States  to  pass 
laws  requiring  the  full  amount  of  policies  to  be  paid  in  event 
of  total  destruction  by  fire  of  personal  property  covered  by 
insurance,  no  such  law  is  in  force. 

Where  buildings  are  concerned  the  case  is  not  so  simple. 
It  is  hard  to  persuade  the  average  man  that  he  is  not  entitled 
“to  the  amount  his  policy  calls  for,”  as  the  saying  is,  when 
his  building  is  totally  destroyed.  Indeed,  many  men  of  intel- 
ligence believe  that  he  is  so  entitled — probably  the  majority 
of  people  in  many  sections  of  the  country.  Yet  the  values 
of  buildings  are  by  no  means  stable.  A building  costing 


YALE  INSURANCE  LECTURES. 


39 


$10,000,  and  built  at  a time  when  labor  and  material  are  at 
high  prices,  may  be  worth  much  less  a few  years  later  when 
these  commodities  are  at  low  prices  and  when  the  building 
itself  has  depreciated  from  use  and  lack  of  proper  repair. 
Again,  a building  not  well  designed  for  its  proposed  occu- 
pancy, or,  through  bad  judgment,  so  located  as  to  be  useless 
for  the  purposes  for  which  it  was  intended,  may  become 
practically  worthless — without  value.  Every  city,  almost  every 
village,  contains  such  buildings.  So  that  the  insurance  carried, 
which  was  taken  out  in  good  faith,  may,  when  the  fire  comes, 
exceed  the  value  of  the  building.  No  fewer  than  twenty-one 
States  have  laws  providing  that  where  the  insured  building  is 
totally  destroyed  by  fire  the  insurance  companies  shall  in  every 
case  pay  the  full  amount  of  their  policies,  unless,  of  course, 
the  contract  has  been  in  some  way  invalidated.  Nor  in  such 
States  are  companies  allowed  to  present  any  evidence  tending 
to  prove  a smaller  value  than  the  amount  of  insurance.  Hence 
such  laws  are  called  “Valued  Policy”  laws — because  policies 
affected  by  them  are  “valued” — i.  e.,  the  value  of  the  property 
insured  is  fixed  by  the  contract  and  cannot  be  disputed. 
The  thought  ordinarily  back  of  such  laws  seems  to  be  some- 
thing like  this : The  insurance  company  has  accepted  pre- 
miums on  a certain  amount,  thereby  recognizing  the  value  of 
the  property  to  be  at  least  as  much  as  the  insurance,  for  no 
company  wants  to  insure  property  for  more  than  its  worth; 
therefore,  having  accepted  the  premium  on,  say  $1,000,  and 
having  carried  that  amount  of  insurance  on  a building  for 
several  years,  it  is  unjust  for  a company  to  claim,  after  a fire, 
that  the  building  was  worth  only  $800  and  that  the  insured 
has  lost  and  is  entitled  to  recover  that  amount  only.  It  must 
be  remembered,  however,  that  the  information  upon  which  the 
amount  of  the  insurance  was  based  came  from  the  insured. 
He  furnished  the  data  for  this  purpose,  which  ordinarily 


40 


YALE  INSURANCE  LECTURES. 


the  insurance  company  has  not  actually  verified.  Were  it 
practicable  and  advisable  for  insurance  companies  to  accurately 
and  rigidly  determine  the  value  of  every  piece  of  property 
which  is  insured,  and  were  that  value  (once  ascertained)  fixed 
and  not  subject  to  fluctuation,  it  might  with  some  justice  be 
held  that  an  insured,  in  the  event  of  the  total  destruction  of 
the  property  covered,  was  entitled  to  receive  the  total  amount 
for  which  his  policy  had  been  issued.  But  values  are  not 
stable,  neither  could  such  investigations  be  made  by  companies 
without  an  expense  which  would  excessively  increase  the  cost 
of  insurance.  Nor  as  a matter  of  fact  are  they  necessary. 

A calculation  based  upon  the  experience  of  some  350,000 
policies  indicates  that  about  one  policy  in  thirty  results  in  a 
claim,  large  or  small.  Of  these  claims  not  over  10  per  cent, 
are  for  total  losses  so  far  as  the  policies  are  concerned,  and 
a considerably  smaller  percentage  of  course,  so  far  as  the 
property  is  concerned.  Therefore,  we  may  assume  that,  of 
100,000  buildings  of  all  kinds  insured,  not  more  than  3,333 
suffer  loss  and  not  to  exceed  333  are  totally  destroyed,  hence 
only  under  333  out  of  100,000  contracts  can  the  question 
arise  whether  the  value  is  less  than  the  insurance.  To  actually 
determine  in  advance  the  value  of  the  entire  100,000  buildings 
would  cost  probably  more  than  the  losses  arising  from  them, 
and,  of  course,  this  additional  cost  would  have  to  be  added 
to  the  price  paid  by  the  property  owner  for  his  insurance. 
Moreover,  since  insurance  policies  are  usually  issued  for  short 
terms,  and  since  buildings  undergo  frequent  changes  from 
various  causes,  this  extra  cost  would  have  to  be  met  every 
time  the  insurance  was  transferred  from  one  company  to 
another,  and  every  time  for  any  reason  the  value  of  the  build- 
ings suffered  change.  On  the  other  hand,  the  cost  of  fixing 
the  value  on  the  333  buildings  totally  destroyed  is,  com- 
paratively speaking,  insignificant.  Furthermore,  the  owner  of 


YALE  INSURANCE  LECTURES. 


41 


the  property  is  supposed  to  know  and  ought  to  know  the 
value  of  his  building,  and  since  all  fire  insurance  contracts 
are  based  on  good  faith,  companies  have  a reasonable  ground 
for  relying  on  the  statements  of  the  owner  when  issuing 
policies,  and  should  not  in  equity  be  compelled  to  make  a 
payment  which  by  causing  a profit  to  the  insured  violates  one 
of  the  fundamental  principles  on  which  the  business  is 
founded,  even  though  they  may  have  been  led  by  the  state- 
ments of  the  owner  to  issue  a policy  for  more  than  the  actual 
worth  of  the  property.  Where  valued  policy  laws  have  been 
passed  they  have  resulted  in  disaster  to  the  property  owner. 
Since  they  make  fraud  easy  by  securing  profit  to  those  who 
secure  policies  in  excess  of  the  value  of  their  property,  they 
operate  to  largely  increase  the  fire  waste  and  therefore  and 
inevitably  increase  rates.  The  case  against  such  laws  is 
vigorously  stated  by  Hon.  W.  S.  Matthews,  formerly  Superin- 
tendent of  Insurance  in  the  State  of  Ohio : 

“The  objection  to  a valued  policy  law  is  that  it  ignores 
the  fundamental  principle  of  insurance,  which  is  that  of 
indemnity  pure  and  simple,  and  compels  the  company  to  pay 
the  full  amount  named  in  the  policy,  although  the  actual  loss 
may  be  but  one-half  or  two-thirds  that  amount.  To  put  this 
construction  upon  the  obligation  of  the  insurance  contract  is 
to  convert  the  whole  scheme  of  insurance  into  a money- 
making and  gambling  transaction.  It  is  a statute  that  may 
make  it  more  profitable  to  destroy  property  than  to  keep  it. 
It  is  a statute  that  places  before  every  evil  disposed  person 
the  temptation  to  over-insure  and  then  burn  his  property  for 
the  gain  there  is  in  it.  And  even  where  the  assured  is  honest, 
he  is  liable  to  be  made  more  indifferent  as  to  the  care  he 
should  take  of  his  property  by  over-insurance.  Every  prop- 
erty owner  should  at  least  carry  some  of  the  risk  which 
attaches  to  property.  It  is  not  a statute  in  the  interest  of 


42 


YALE  INSURANCE  LECTURES. 


honest  policy-holders,  but  only  in  the  interest  of  the  dishonest 
man.  The  honest  policy-holders  of  the  State,  therefore,  lose 
in  two  ways  on  account  of  this  law.  First,  because  of  the 
increased  rate  of  insurance  on  account  of  the  increased  moral 
hazard  superinduced  by  the  valued  policy  law.  And,  second, 
because  of  the  increased  fire  exposure  on  account  of  the 
incentive  to  burn  or  to  be  careless  of  excessively  insured 
property.  It  is  very  evident  that  if  valued  policy  laws  increase 
the  fire  loss,  they  must  necessarily  increase  rates  of  insurance, 
for  rates  increase  or  decrease  in  proportion  to  the  increase 
or  decrease  of  fire  loss.  The  only  protection  a company  has 
against  adverse  conditions,  whether  in  legislation  or  society, 
is  the  adjustment  of  rates.  The  extra  loss  to  companies  on 
account  of  the  valued  policy  law  is  certainly  shifted  from 
them  on  to  the  honest  policy-holders  of  the  State.  The  policy- 
holders, therefore,  are  the  ones  to  pay  these  extra  losses, 
and  instead  of  this  law  being  a benefit  to  them  it  is  an  expen- 
sive and  costly  experiment.  I can  conceive  of  nothing  that 
the  State,  in  its  legislative  capacity,  can  do,  more  dangerous 
to  the  prosperity  of  the  State,  and  to  public  morals,  than 
to  pass  a law  that  invites  wilful  and  malicious  destruction  of 
property,  or  encourages  carelessness  in  the  care  of  property.,, 

There  is,  of  course,  some  cause  for  the  passage  of  such 
laws.  They  have  been  passed  usually  in  States  where  the 
farmer  class  predominate,  and  in  most  cases  at  the  request  of 
farmers. 

There  was  a time  when  the  insurance  of  farm  property  was 
eagerly  sought  after  by  insurance  companies.  It  afforded  the 
largest  class  of  safely  distributed  and,  apparently,  least  hazard- 
ous class  of  property  in  the  market.  It  is  unfortunately  true 
that  some  insurance  companies  (not  a large  number)  habit- 
ually urged  farmers  to  take  out  policies  for  as  large  amounts 
as  they  could  be  persuaded  to  purchase,  the  companies  rely- 


YALE  INSURANCE  LECTURES. 


43 


ing  upon  the  law  to  keep  the  claims  down  to  actual  values. 
When  a loss  occurred  under  such  a policy  the  indignation  of 
the  farmer  was  aroused  and  as  a remedy  and  safeguard  he 
secured  the  passage  of  a valued  policy  law.  Insurance  com- 
panies and,  incidentally,  the  public  are  suffering  because  of  the 
faults  of  a few  of  their  number,  but  this  fact  does  not  inter- 
fere with  the  truth  of  the  statement  that  such  laws  are  vicious 
in  that  they  encourage  and  legalize  fraud  by  making  it  possi- 
ble for  the  insured  to  derive  a profit  from  the  destruction  of 
his  property;  unjust  since  they  victimize  insurance  companies, 
and  extravagant  and  wasteful  since  they  have  been  conclu- 
sively proven  to  have  increased  the  fire  waste  and  the  cost 
of  fire  insurance  in  the  States  where  they  are  enforced.  The 
history  of  their  operation  clearly  shows  that  they  help  none 
but  the  fraudulent  or  unreasonable  claimant,  while  they  bring 
serious  financial  loss  to  the  insurance  companies  and  insuring 
public  as  well.  Such  a law  was  passed  by  the  Legislature  of 
Iowa  in  1900.  In  his  message  vetoing  the  law,  Governor 
Shaw,  now  Secretary  of  the  Treasury,  gave  perhaps  the  clear- 
est and  most  convincing  indictment  of  it  that  has  yet  been 
penned.  A study  of  that  document  is  highly  recommended. 

The  next  thing  to  be  noticed  in  our  definition  is  that  there 
must  be  actual  destruction  of  material  value,  and  that  the 
liability  of  the  company  is  only  for  such  material  value;  that 
is,  value  which  can  be  measured  in  money  or  other  commod- 
ities. Usually  this  is  called  the  fair  cash  market  value  of  the 
property  affected,  being  the  actual  value  at  time  of  fire.  This 
principle  is  also  very  important  and  not  always  clearly  appre- 
hended. It  puts  out  of  the  reckoning  any  sentimental  value, 
such  as  pertains,  for  instance,  to  heirlooms,  gifts,  family  por- 
traits, documents,  etc.,  and  limits  the  claims  which  there  may 
be  made  on  account  of  the  loss  of  such  articles  to  a fair 
cash  market  or  exchange  value.  It  is  manifest  that  to  the 


44 


YALE  INSURANCE  LECTURES. 


individual  owner  a family  portrait  or  heirloom  may  be  of 
inestimable  value,  even  though  the  painting  may  be  a bad  one, 
or  the  heirloom  useless  and  ugly.  Such  values,  however, 
are  not  inherent  in  the  articles  themselves,  but  rather  spring 
from  the  history  of  them.  They  cannot  be  measured  in  dol- 
lars and  hence  are  not  proper  subjects  for  insurance. 

The  value  which  is  contemplated  by  an  insurance  policy 
may  perhaps  be  best  shown  by  a few  examples.  The  value 
of  a building  is  what  it  would  cost  to  reinstate  it  in  the  same 
condition  as  before  the  fire,  subject  to  a reasonable  deduction 
for  depreciation  from  use  or  neglect.  The  value  of  the  man- 
ufacturer’s goods  is  made  up  of  the  cost  of  his  raw  material 
at  the  time  of  the  fire,  plus  transportation  charges  and  cost 
of  manufacture.  The  value  of  his  machinery  could  be  meas- 
ured by  what  it  would  cost  at  the  time  of  the  fire  to  purchase 
and  set  up  machines  similar  to  those  destroyed,  with  a suita- 
ble deduction  for  the  difference  in  value  between  old  and  new 
machinery.  The  list  might  be  prolonged  indefinitely,  but  the 
above  examples  will  suffice. 

It  will  be  seen  that  the  value  is  limited  by  the  cost  of 
replacement  at  the  time  of  fire.  This  may  be  more  or  less 
than  the  original  cost  to  the  owner.  If  a grain  dealer  buys 
wheat  at  70  cents  per  bushel,  and  his  storehouse  burns  at  a 
time  when  a similar  grade  of  wheat  commands  a price  of  90 
cents  per  bushel  in  the  open  market,  then  90  cents  per  bushel 
is  the  limit  of  his  claim.  If,  on  the  contrary,  the  price  has 
fallen  to  50  cents  per  bushel,  that  is  the  limit.  So,  also,  the 
value  of  a building  increases  and  decreases  with  the  cost 
of  labor  and  material.  In  many  cases,  in  fact  in  most  cases, 
some  deduction  from  the  market  cost  must  be  made  for  depre- 
ciation in  arriving  at  present  values.  This  subject  of  depre- 
ciation is  the  cause  of  much  dispute  in  the  settlement  of 
losses.  All  things  depreciate.  Some,  like  fire-proof  build- 


YALE  INSURANCE  LECTURES. 


45 


ings,  very  slowly;  others,  such  as  perishable  commodities,  and 
delicate  and  frail  articles,  very  rapidly.  Complicated,  delicate 
and  fast-running  machinery  furnishes  a good  example.  For 
instance,  automobiles  and  threshing  machines.  These  are  high 
priced  and  receive  hard  usage,  and  their  value  vanishes 
rapidly.  An  automobile  which  is  three  years  old  has  lost  a 
large  part  of  its  value,  and  a threshing  machine  five  years  old 
is  practically  valueless.  Depreciation  from  use  simply  means 
that  things  wear  out. 

But  there  are  other  kinds  of  depreciation.  Change  of 
fashions  is  a most  effective  depreciator.  Who  will  at  Easter 
time  this  year  attribute  any  particular  value  to  a last  year’s 
Easter  bonnet?  Fire  cannot  destroy  its  fair  cash  value,  for 
the  mandate  of  Parisian  fashions  has  obliterated  that. 

Changes  in  processes  often  destroy  or  lessen  the  value  of 
machinery.  Old-fashioned  nail  machines  and  old-fashioned 
flour  mill  machinery  have  no  present  value;  they  have  been 
thrown  on  the  rubbish  heap  or  the  scrap  pile  by  all  progressive 
manufacturers. 

The  next  thing  to  be  noticed  is  that  only  actual  immediate 
damage  is  covered  by  insurance;  that  is,  damage  which  is 
attributable  directly  to  the  fire,  or  which  is  the  immediate  re- 
sult of  fire.  Thus  a fire  insurance  company  insuring  a stock 
of  merchandise  would  in  case  of  loss  be  liable  for  the  value 
of  the  property  actually  consumed,  and  also  damage  to  the 
remaining  property  caused  by  fire,  smoke  and  the  process  of 
extinguishing  the  fire.  It  would  not  be  liable,  however,  for 
any  loss  caused  by  the  interruption  or  derangement  of  busi- 
ness and  consequent  loss  of  profit. 

An  insurance  policy  is  a personal  contract.  It  does  not  fol- 
low the  property,  nor,  properly  speaking,  insure  it  at  all, 
though  the  language  of  the  day  gives  a contrary  impression. 
It  is  an  agreement  to  indemnify  a policy-holder  for  the 


4 6 


YALE  INSURANCE  LECTURES. 


loss  accruing  to  him  personally  by  reason  of  the  destruction 
or  damage  of  certain  property.  Accordingly,  no  person  who 
is  not  the  owner  of  the  property  burned,  or  who  has  no 
interest  in  it,  can  be  a claimant  against  an  insurance  com- 
pany. Nor  can  an  owner  make  claim  on  account  of  any 
other  property  than  that  directly  mentioned  or  logically  im- 
plied in  the  policy  itself.  All  policies,  therefore,  should 
clearly  set  forth  the  description  of  the  property  to  be  insured 
and  the  interest  of  the  policy-holder  therein.  While  no  one 
can  insure  property  unless  he  has  a valuable  interest  therein, 
any  kind  of  an  interest  which  can  be  valued  in  cash  may  be 
insured.  Accordingly,  a man  who  loans  money  on  a building 
acquires  an  interest  in  it,  and  he  may  insure  that  interest, 
either  separately,  or,  as  is  the  custom,  in  conjunction  with  the 
owner  of  the  building,  both  interests  being  covered  by  one 
contract.  A purchaser  who  has  paid  in  part  for  property 
which  he  may  not  receive  until  full  payment  is  made, 
acquires  an  interest  which  may  be  protected  by  insurance. 
A life  interest  in  property,  also  the  reversionary  interest  of 
the  final  legatee,  may  be  insured.  In  fact,  any  tangible,  valua- 
ble interest  in  any  kind  of  property  may  be  made  the  subject 
of  an  insurance  policy.  It  is  a maxim  of  the  business,  how- 
ever, that  the  value  of  all  such  interests  must  not  exceed  the 
actual  cash  value  of  the  property  itself. 

In  addition  to  the  interests  already  mentioned,  it  is  possible 
to  insure  against  the  loss  of  almost  any  ascertainable  value 
which  is  subject  to  obliteration  or  depreciation  by  fire.  Thus, 
the  rental  income  of  a building  may  be  insured  by  a contract 
which  will  make  good  the  loss  of  rent  during  the  time  the 
building  is  rendered  untenantable  by  fire.  So,  also,  in  certain 
cases,  what  is  called  the  use  and  occupancy  of  a manufacturing 
plant;  that  is  to  say,  its  ability  to  turn  out  the  appropriate 
finished  product  in  regular  quantities,  may  be  insured  against 
interruptions  by  fire. 


YALE  INSURANCE  LECTURES. 


47 


The  property  to  be  insured  must  be  definitely  described.  A 
policy  so  written  as  to  cover  a stock  of  boots  and  shoes  will 
not  also  cover  dry  goods,  nor  will  a policy  insuring  a building 
also  insure  outbuildings  or  awnings.  The  written  description 
forming  part  of  every  policy  must  either  specifically  mention 
everything  to  be  insured,  or  must  be  couched  in  such  broad 
terms  as  to  include  everything  for  which  protection  is  desired. 
Thus  a contract  insuring  merchandise  would  protect  every- 
thing kept  for  sale,  the  word  “merchandise”  being  very  broad 
in  its  connotation;  whereas  a contract,  as  above,  insuring  a 
stock  of  boots  and  shoes,  would  cover  nothing  else. 

In  order  to  appreciate  the  relations  which  exist  between  a 
fire  insurance  company  and  the  insured  we  must  bear  in 
mind  the  following  facts,  which  will  also  indicate  the  reasons 
for  the  carefully  drawn  and  somewhat  stringent  contracts  by 
which  insurance  is  undertaken. 

In  the  first  place,  property  covered  by  insurance  is  not  only 
for  the  most  part  in  the  custody  of  the  insured,  but  is  usually 
occupied,  operated  or  handled  by  him.  Moreover,  and  this  is 
even  more  important,  the  information  upon  which  the  insur- 
ance is  predicated  is  furnished  by  the  insured,  hence  the 
obvious  opportunities  for  fraud  which  the  stringent  policy 
conditions  are  intended  to  prevent — an  intention  which  is  only 
partially  accomplished,  as  the  experience  of  every  company 
will  demonstrate.  In  this  connection  a comment  from  a New 
York  court  will  be  appropriate: 

“In  negotiating  a contract  of  insurance  the  parties  are  not 
upon  a level,  nor  do  they  deal  at  arm’s  length.  The  insurer, 
i.  e.,  the  company,  is  presumed  to  be  ignorant,  and  the  insured 
informed  in  respect  to  the  subject  to  be  insured.  Hence,  in 
forming  the  contract,  the  insurer,  except  he  undertake  to 
inquire  for  himself,  does  not  rely  on  his  own  resources,  but 
reposes  exclusively  on  the  intelligence  communicated  by  the 


48 


YALE  INSURANCE  LECTURES. 


insured.  And  hence,  further,  the  parties  occupying  this  un- 
equal position,  the  law  exacts  of  the  party  holding  the  position 
of  advantage — i.  e.,  the  insured — the  utmost  good  faith  and 
candor  in  communicating  the  facts  affecting  the  risk.” 

Again,  Mr.  Hine,  in  his  Book  of  Instruction,  says: 

“In  no  contract  is  one  party  more  completely  at  the  mercy 
of  another  than  the  underwriter,  i.  e.  the  company,  in  insur- 
ance. He  is  necessarily  ignorant  of  facts  and  circumstances 
that  may  be  vital  to  the  risk  and  hence  open  to  the  fraud  of 
designing  men,  who  may  withhold  or  misrepresent  'material’ 
facts.” 

Some  mention  in  the  preceding  lecture  has  already  been 
made  of  the  significant  features  of  the  earliest  insurance  con- 
tracts, or  policies,  as  they  began  to  be  called  somewhere  about 
1700,  and  did  space  permit,  the  history  of  the  development  of 
the  fire  insurance  contract  and  its  attendant  clauses  would 
well  repay  investigation  and  is  recommended  as  an  interesting 
and  highly  instructive  topic  for  independent  work  for  any 
who  may  care  to  pursue  their  studies.  The  present  discus- 
sion, however,  must  be  limited  for,  the  most  part  to  contracts 
now  in  general  use,  and  the  history  of  the  development  which 
leads  up  to  them  cannot  even  be  briefly  indicated  here  beyond 
the  statement  that  the  simple  and  brief  policies  used  in  the 
early  days  of  insurance  history  have  expanded  into  the  lengthy 
and  complex  documents  now  in  general  use  by  gradual  pro- 
cess of  development,  the  numerous  changes  embodying  the 
results  of  the  experience  of  the  intervening  years.  Each  new 
clause  or  provision  has  a history. 

Copies  of  the  earliest  policies  issued  in  this  country  are 
before  you.  One  of  them — that  issued  by  the  partnership 
known  as  the  Hartford  Fire  Insurance  Company — is  extremely 
peculiar  in  its  language  and  is,  indeed,  nothing  more  than  a 
marine  insurance  policy  somewhat  clumsily  adapted  to  the 


YALE  INSURANCE  LECTURES. 


49 


uses  of  fire  insurance.  It  is  a modification  of  the  policy 
issued  in  Holland  and  is  commonly  known  as  the  “Amsterdam 
Policy.”  It  is  a very  loosely  drawn  and  imperfect  paper. 
So  far  as  known,  it  was  never  used  in  America  save  for  a 
few  years  by  the  company  above  mentioned. 

The  other  copies  of  ancient  policies  before  you,  i.  e.  those 
of  the  Philadelphia  Contributionship,  Mutual  Assurance  Com- 
pany of  Philadelphia,  and  the  Insurance  Company  of  North 
America,  resemble  one  another  closely  and  are  closely  modeled 
after  the  English  policies  in  use  when  insurance  began  to  be 
practiced  in  this  country.  These  policies  contained  few  pro- 
visions and  were  quite  simply  worded.  As  a matter  of  fact, 
they  failed  to  provide  for  any  of  the  contingencies  likely  to 
arise  during  the  settlement  of  a loss,  nor  did  they  by  any 
means  clearly  define  and  limit  the  rights  and  the  responsi- 
bilities of  the  contracting  parties. 

While  most  of  the  policies  issued  during  the  early  years 
of  the  nineteenth  century  were  similar,  yet  divergencies  arose 
at  a comparatively  early  date  owing  to  changes  and  additions 
which  resulted  from  the  varying  experiences  and  theories  of 
different  underwriters.  These  differences  were  increased  by  the 
efforts  of  those  companies  who  strove  to  gain  favor  by  attrac- 
tive forms  of  contracts,  also  by  those  who  endeavored,  by  cun- 
ningly worded  and  over-stringent  forms,  to  prepare  pretexts  by 
which  the  payment  of  losses  claimed  might  be  avoided.  This 
latter  practice  has  even  to  this  day  characterized  many  con- 
tracts made  attractive  at  first  sight  by  their  low  prices.  The 
swindler  in  fire  insurance,  as  in  other  lines  of  business,  en- 
deavors to  market  worthless  wares  by  quoting  prices  below 
those  at  which  valuable  and  reliable  articles  can  be  secured. 
Since  it  usually  happens  that  more  than  one  company  carries 
insurance  on  the  same  property,  the  difference  in  forms  of  con- 
tracts above  referred  to  often  produced  dispute  and  con- 


4 


5° 


YALE  INSURANCE  LECTURES. 


fusion  when  claims  arose  under  them.  Until  1867,  however, 
no  great  degree  of  uniformity  was  attempted.  The  various 
insurance  centers,  such  as  Boston,  Hartford,  New  *York,  Phil- 
adelphia and  New  Orleans,  each  had  its  characteristic  form, 
some  companies  doing  a widely  extended  business  using  vari- 
ous forms  in  different  parts  of  the  country. 

In  1867  and  1868  the  National  Board  of  Underwriters,  an 
organization  comprising  most  of  the  leading  fire  insurance 
companies  of  the  country,  and  which  has  had  a very  important 
influence  upon  the  development  of  the  fire  insurance  business, 
devised  and  adopted  a form  of  contract  or  policy  designed  to 
be  universally  used.  However,  few  companies  outside  of  the 
city  of  New  York  adopted  the  form  in  its  entirety,  and  the 
annoyance  to  which  the  public  were  subjected  by  the  varying 
kinds  of  contracts  brought  about  in  1873,  in  the  State  of  Mas- 
sachusetts, a law  providing  for  a standard  form  of  policy, 
and  in  1880  the  Massachusetts  standard  policy  was  made  obli- 
gatory upon  all  companies  operating  in  that  State. 

In  1886  the  State  of  New  York  also  adopted  a standard 
form  of  policy  which  became  mandatory  January  15,  1887. 
This  policy  was  devised  by  the  superintendent  of  insurance 
in  consultation  with  various  eminent  insurance  officials  and 
organizations.  It  was  carefully  prepared  and  is,  on  the  whole, 
while  not  altogether  beyond  criticism,  the  most  useful  and  sat- 
isfactory fire  insurance  contract  yet  brought  into  anything  like 
general  use.  It  has  been  made  mandatory  by  seven  other 
States,  and  is  commonly  used  by  all  insurance  companies 
doing  a widely  extended  business  throughout  the  United 
States  wherever  the  laws  of  individual  States  do  not  forbid. 

Other  forms  of  standard  policies  have  been  adopted  by  the 
States  of  Maine,  Massachusetts,  New  Hampshire,  Michigan, 
Missouri,  Virginia  and  Wisconsin,  but  are  all  inferior  to  the 
New  York  form,  which  we  will  accordingly  adopt  as  the 


YALE  INSURANCE  LECTURES. 


51 


basis  of  our  discussion.*  The  standard  policy  is  a form  with 
the  conditions  and  stipulations  printed  in  a certain  size  type 
prescribed  by  law  so  that  it  may  be  plainly  read.  Every 
thing  is  prescribed  by  law  except  the  premium,  the  term,  date 
and  amount.  A space  is  left  for  the  proper  description  of  the 
particular  piece  of  property  to  be  insured. 

The  first  part  of  the  contract,  below  the  name  of  the  com- 
pany, is  the  statement  of  the  consideration.  Policies,  like 
most  other  contracts,  are  not  valid  without  a valuable  con- 
sideration. The  important  thing  to  notice  here  is  that  not 
only  the  premium  paid,  but  also  the  printed  stipulations  of  the 
policy  are  a part  of  this  consideration.  Next  follows  the 
name  of  the  person  or  corporation  to  whom  the  contract  is 
issued.  Then  the  beginning,  duration,  and  ending  of  the 
period  for  which  the  contract  is  to  run  are  clearly  stated. 
You  will  note  that  the  contracts  begin  and  end  at  noon.  For 
some  reasons  it  would  be  more  convenient  to  have  a later 
hour  than  12  o’clock,  so  that  the  policies  might  end  at  the 
close  of  a complete  business  day.  Whether  the  language  used 
means  the  solar  noon,  i.  e.,  the  moment  when  the  sun 
crosses  the  meridian,  or  12  o’clock  according  to  the  stand- 
ard time  at  the  particular  place  where  the  policy  covers,  is  not 
yet  definitely  settled  by  the  courts.  Next,  the  policy  limits 
the  amount  for  which  the  company  may  be  liable.  Then 
comes  a clause  limiting  the  application  of  the  policy  to  the 
property  described  while  in  the  location  mentioned  in  the 
policy  only.  Needless  to  say,  the  contract  is  made  and  the 
rate  of  premium  fixed  according  to  the  hazard  of  the  location 
of  the  property  when  insured,  hence  the  policy  must  be  con- 
fined to  that  location,  unless  altered  by  a new  agreement  be- 
tween the  parties  to  it.  Next  follows  a space  for  the  descrip- 
tion of  the  property  to  be  insured;  also  for  a description  of 

* A copy  of  the  printed  conditions  of  the  New  York  Standard  policy  will  be 
found  at  the  back  of  the  book. 


52 


YALE  INSURANCE  LECTURES. 


its  location  and  for  any  additional  permits,  stipulations  or 
agreements  (such  as  a permit  allowing  other  insurance,  or  for 
the  use  of  gasolene,  etc.),  which  may  be  agreed  upon  by 
the  company  and  the  policy-holder,  which  additional  agree- 
ments, however,  must  not  be  in  conflict  with  the  mandatory 
legal  conditions  of  the  policy.  After  the  description  follow 
six  lines  which  define,  briefly  and  fully,  the  liability  of  the 
company  and  the  method  for  settlement  and  payment  of  losses. 
The  first  two  lines  have  already  been  anticipated  and  do  not 
need  further  comment.  Lines  3 to  6 refer  to  the  'floss  settle- 
ment” and  will  be  touched  upon  in  a subsequent  lecture. 

We  now  come  to  what  are  commonly  called  the  condi- 
tions of  the  policy. 

Lines  7 to  10  provide  for  the  forfeiture  of  the  policy  by  mis- 
leading or  fraudulent  acts  or  by  concealment  of  material  facts 
on  the  part  of  the  assured.  The  policy  is  based  upon  the 
representations  and  statements  of  the  insured  and  therefore 
it  is  but  fair  that  the  company  should  not  be  bound  in  a case 
where  its  contract  has  been  secured  by  false  statements,  or  be- 
cause of  the  suppression  or  concealment  of  some  material 
fact  affecting  the  hazard.  Most  of  the  provisions  in  these 
lines  refer  to  the  negotiations  attending  the  issuance  of  the 
policy. 

Lines  11  to  30  render  a policy,  which  may  have  been  valid 
during  a part  of  its  term,  void  in  case,  during  its  life,  some 
act  of  the  assured  or  within  his  knowledge  operates  to 
materially  alter  the  conditions  of  the  property  insured  as  to 
hazard  or  ownership.  Since  the  contract  is  a personal  one 
it  is  obvious  that  a change  in  ownership  makes  it  of  no  effect. 
Furthermore,  the  contract  was  made  in  view  of  the  hazards 
existing  at  the  time  of  its  issuance  and  was  determined  in 
several  important  respects  by  those  circumstances,  hence  a 
material  increase  of  hazard  cannot  be  assumed  without  a 
re-arrangement  of  the  contract — generally  as  to  price,  but  also 


YALE  INSURANCE  LECTURES. 


53 


often  as  to  the  amount  which  the  company  is  willing  to  carry. 
Some  of  the  hazards  mentioned  in  these  lines,  such  as  vacancy, 
generating  of  gas,  storage  of  fire  works,  etc.,  are  so  dan- 
gerous that  most  companies  will  not  assume  or  continue  lia- 
bility where  they  exist.  All  of  the  changes  mentioned  in  these 
lines  are  considered  to  affect  the  hazards  involved.  It  will 
be  noticed  that  the  saving  clause  ‘'unless  otherwise  provided 
by  agreement  indorsed  hereon  or  added  hereto”  makes  it 
possible  to  alter  an  existing  contract  so  as  to  permit  any  or 
all  of  the  changes  mentioned  in  the  lines  under  consideration, 
i.  e.,  lines  n to  30,  and  as  a matter  of  fact  almost  every 
policy  does  permit  one  or  more  of  the  hazards  or  changes 
prohibited  in  these  lines. 

Lines  31  to  32  exempt  the  company  from  liability  on 
account  of  fires  caused  by  war,  riot,  or  public  authority. 
Such  losses  for  the  most  part  can  be  recovered  from  the 
municipality,  and  insurance  would  be  a double  compensa- 
tion. Moreover,  such  losses  are  by  their  nature  extraordinary 
and  unavoidable  under  prevailing  conditions.  Even  the  appa- 
ratus for  extinguishing  fire,  the  presence  of  which  may  largely 
have  reduced  the  price,  cannot  be  used. 

Lines  32^  to  35  in  part  exempt  the  company  from  losses 
which  may  be  concurrent  with  a fire  loss,  but  are  not  losses 
by  fire  itself.  If  the  assured  remove  his  goods  endangered 
by  fire  to  a place  of  safety,  it  is  no  more  the  province  of  the 
insurance  company  to  protect  them  from  theft  than  before. 
Often  companies  do  pay  for  stolen  articles,  but  only  because 
it  cannot  always  be  determined  whether  these  were  burnt  or 
purloined.  So,  too,  when  an  explosion,  as,  for  instance,  of  a 
boiler,  is  followed  by  fire,  the  company  can  be  held  for  loss 
caused  by  fire  only,  and  must  be  relieved  from  claims  on 
account  of  any  damage  shown  to  have  been  caused  by  the 
explosion.  The  clause  freeing  companies  from  liability  when 
an  assured  has  failed  to  use  reasonable  means  to  save  the 


54 


YALE  INSURANCE  LECTURES. 


property  is  rarely  effective.  The  burden  of  proof  is  upon  the 
company  in  such  case,  and  it  is  practically  impossible  to  estab- 
lish beyond  a doubt  that  the  loss  or  damage  was  brought 
about  by  the  assured’s  neglect  to  use  reasonable  means  to  pre- 
serve and  save  the  property. 

Lines  36  and  37:  When  a building  falls  as  the  result  of 
weakened  foundations,  or  is  overthrown  by  a wind  storm,  or 
some  other  cause,  the  fire  insurance  covering  it  instant!}' 
ceases  for  the  reason  that  such  a building  at  once  loses  its 
value  and  becomes  a heap  of  debris.  Fires  usually  start  in 
such  cases  from  some  overthrown  lamp  or  stove,  but  the 
fire  burns  only  the  debris  of  a building  already  destroyed, — 
not  the  building  itself. 

Line  38  provides  that  certain  articles  not  as  a rule  inher- 
ently valuable,  but  being  the  evidence  of  value,  shall  not  be 
insured.  Money  and  securities  are  also  included  in  this  list. 
These  articles  afford  such  opportunities  for  fraud,  can  be  so 
easily  concealed,  and  the  amount  of  them  is  so  impossible  to 
determine  except  from  the  statement  of  the  insured,  that  to 
insure  them  would  put  the  company  so  absolutely  at  the 
mercy  of  the  claimant  that  companies  have  never  been  willing 
to  assume  liability  on  them. 

Lines  39  to  41  Yz  refer  to  articles  concerning  which  there 
might  be  some  dispute  as  to  the  application  of  a policy  couched 
in  general  terms,  or  concerning  the  value  of  which  a difference 
of  opinion  might  readily  arise,  and,  in  general,  articles  of  a 
class  which  companies  will  not  willingly  insure  unless  under 
exceptional  conditions.  Hence  it  is  provided  that,  in  order  that 
these  be  included  within  the  scope  of  a policy,  they  must  be 
specifically  mentioned.  They  are  by  no  means  prohibited 
from  insurance;  in  fact,  they  are  very  commonly  insured. 

The  last  of  line  41  and  line  4 2 merely  express  certain 
truths  involved  in  the  caption  of  the  policy  by  the  words 
“direct  loss  or  damage  by  fire.” 


YALE  INSURANCE  LECTURES. 


55 


Line  43  is  intended  simply  to  put  the  several  companies  who 
may  happen  to  insure  the  same  building  under  different  forms 
of  contracts  on  an  equality  as  to  certain  very  perishable 
items. 

Lines  45  and  46  merely  emphasize  lines  7 to  9 as  to  certain 
written  statements  made  by  the  assured  or  assented  to  by  him 
prior  to  the  issuance  of  policy. 

Lines  47  and  48  are  inserted  for  the  protection  of  the 
companies,  because,  under  the  common  law,  an  insurance  con- 
tract may  be  affected  or  altered  by  verbal  agreement,  and 
because  many  of  the  details  between  agents  and  insurers 
must  be  handled  by  clerks.  A clerk  or  a middleman  may 
deliver  a policy,  collect  the  premium  for  the  agent  of  the 
company,  or  even  take  an  order  for  him,  but  cannot  act  as 
authoritative  agent  of  the  company  unless  so  empowered  by 
the  company  in  writing.  Many  times  claims  for  special  terms, 
privileges,  etc.,  are  based  on  alleged  verbal  promises  of  clerks 
or  middlemen. 

Lines  49  and  50  simply  enforce  the  conditions  embraced  in 
lines  7 to  30  as  to  a policy  renewed.  In  other  words,  they 
renew  the  obligation  of  the  assured,  as  well  as  that  of  the 
company. 

Lines  51  to  55  permit  either  party  to  the  contract  to  termi- 
nate it.  In  case  the  company  so  elects,  the  assured  is  allowed 
five  days  in  which  to  secure  other  insurance.  When  the  as- 
sured chooses  to  cancel,  the  company  is  permitted  to  retain 
more  than  the  proportional  fractional  part  of  the  original  pre- 
mium; that  is,  in  case  of  a one  year  policy  canceled  at  six 
months  by  the  assured  the  company  is  allowed  to  retain 
slightly  more  than  one-half  of  the  premium.  This  is  because 
the  company  is  compelled  to  expend  a considerable  part  of 
every  premium  received  in  handling  the  record  of  the  con- 
tract so  as  to  comply  with  the  law,  and  in  other  ways  to 


56 


YALE  INSURANCE  LECTURES. 


consume  at  the  outset  a part  of  each  premium  in  fixed 
charges.  If  it  is  terminated  prior  to  maturity  by  the  assured, 
the  law  holds  the  company  to  be  fairly  entitled  to  recover 
those  fixed  charges.  If  the  company  chooses  to  cancel,  how- 
ever, these  charges  are  lost  and  the  assured  receives  full  re- 
turn premium  according  to  the  time  which  the  policy  has  run. 
Hence,  contracts  are  seldom  terminated  by  companies  without 
good  cause. 

Lines  56  to  59  refer  exclusively  to  mortgage  interests,  and 
provide  that,  as  to  such  interest,  companies  may  alter  the 
policy  conditions  as  they  see  fit.  There  is  some  plausible  rea- 
son for  this,  since  mortgages  based  upon  the  value  of  destructi- 
ble property  must  be  protected  and  it  is  also  necessary  that 
such  protection  shall  not  be  jeopardized  by  some  improper 
action  of  the  borrower,  i.  e.,  the  property  owner. 

Lines  60  and  65  simply  provide  that  the  efforts  of  the 
assured  to  save  his  property  from  destruction  by  removing  it 
from  danger  shall  not  result  to  his  harm.  Ordinarily  a re- 
moval without  the  consent  of  the  company  vitiates  the  policy 
and  lines  60  to  65  simply  make  an  exception  to  this  rule. 

Lines  67  to  95  refer  to  the  procedure  in  settlement  of  losses 
and  will  be  treated  in  the  future  lecture  to  be  given  on  that 
subject. 

Lines  96  to  9 7J4  are  very  important.  They  provide  for  the 
distribution  of  loss  among  the  various  companies  insuring 
identical  property  according  to  the  amount  which  each  com- 
pany carries.  For  instance,  if  there  is  $20,000  total  insurance 
actually  in  force  on  any  piece  of  property  and  one  company 
carries  $5,000  of  this  amount,  that  company  must  pay  and 
must  only  pay  one-quarter  of  any  loss  occurring  to  the  prop- 
erty up  to  the  amount  for  which  it  is  liable;  and  this  con- 
dition is  valid  even  if  one  or  more  of  the  other  companies 
carrying  the  same  risk  are  unable  to  satisfy  the  claims  against 


YALE  INSURANCE  LECTURES. 


57 


them,  for  the  amount  of  insurance  legally  in  force  determines 
the  amount  of  various  liabilities  and  claims.  The  collection 
of  those  claims  is  a subsequent  operation. 

The  last  quarter  of  line  98  up  to  line  99^2  permits  special 
agreements  between  assured  and  companies  as  to  how  policies 
shall  apply.  There  are  several  of  these  agreements  in  common 
use,  which  will  be  described  later  in  this  lecture. 

The  last  half  of  line  100  only  applies  where  one  insurance 
company  assumes  a portion  of  the  liability  of  another  com- 
pany and  permits  such  contracts  between  companies  to  be 
arranged  according  to  the  desires  of  the  two  companies.  This 
standard  form  of  policy  is  intended  to  secure  fair  and  proper 
conditions  between  companies  and  property  owners,  and  such 
contracts  between  companies  as  re-insurances,  so-called,  are 
hardly  within  its  purview. 

Lines  102  to  104  are  intended,  first,  to  prevent  double 
compensation;  that  is,  a profit  to  the  insured,  from  a fire; 
second,  to  compel  those  through  whose  act  or  neglect  the 
loss  occurred  to  make  good  the  loss  they  have  caused.  Public 
policy  as  well  as  equity  demand  this.  It  is  manifest  that  I 
should  not  be  made  free  of  financial  responsibility  for  my 
criminal  or  careless  act  simply  because  the  person  I have 
injured  is  insured.  In  such  cases  companies  commonly  pay 
the  loss  and  then  endeavor  to  collect  from  the  person  or 
corporation  responsible  for  the  occurrence  of  the  loss,  the 
amount  so  paid. 

Lines  106  and  107  are  a statute  of  limitation  to  guard  against 
wilful  and  vexatious  delays  in  making  claims. 

Lines  108  and  109  are  merely  explanatory. 

Lines  no  to  112  are  intended  for  mutual  companies  only, 
and  in  effect  make  the  articles  of  association  of  such  com- 
panies a part  of  the  policy. 

The  remaining  lines  of  the  policy  recite  that  no  conditions 
of  the  policy  may  be  altered  except  those  whose  language 


58 


YALE  INSURANCE  LECTURES. 


provides  for  modification,  and  that  no  permissible  alteration 
may  be  made  except  by  written  endorsement  on  the  policy. 
It  will  be  seen  that  the  whole  purpose  of  the  contract  is  to 
define  the  rights  of  the  two  parties  interested  so  clearly  and 
fairly  that  disputes  may  be  avoided  and  injustice  or  improper 
claims  prevented.  Despite  the  care  exercised  by  its  framers 
to  this  end,  however,  there  is  hardly  a clause  in  the  standard 
form  which  has  not  been  referred  to  some  court  for  authorita- 
tive interpretation,  and  a mass  of  legal  decisions  have  accumu- 
lated which  in  reality  are  collateral  to  the  contract  and  might 
even  with  propriety  be  deemed  a part  of  it.  With  these 
decisions,  curious  and  interesting  as  many  of  them  are,  we 
shall  not  concern  ourselves  here,  the  broad  outlines  of  the  con- 
tract being  sufficient  for  our  purpose. 

Despite  the  apparently  stringent  conditions  and  technical 
exceptions  contained  in  this  contract,  and  although  these  con- 
ditions and  exceptions  are  sometimes  made  the  basis  of  im- 
proper attempts  to  avoid  payment  of  losses  by  unscrupulous 
companies,  there  can  be  no  doubt  that  on  the  whole  and  in  by 
far  the  greater  number  of  cases,  in  fact  almost  universally, 
the  assured  secures  absolute  justice  and  more  from  the  opera- 
tion of  this  form  of  contract.  A very  liberal  estimate  of  the 
amount  of  litigation  under  fire  insurance  policies  indicates  that 
not  over  one-half  of  I per  cent,  of  claims  result  in  law  suits. 
When  it  is  remembered  that  these  claims  are,  in  90  per  cent, 
of  the  cases  occurring,  for  partial  damage  to  property,  con- 
cerning which  there  is  legitimate  opportunity  for  an  honest 
difference  of  opinion  and  in  view  of  the  fact  that  the  validity 
as  well  as  the  amount  of  all  claims  must  be  established  before 
payment,  the  amount  of  ensuing  litigations  is  seen  to  be  abso- 
lutely inconsiderable.  Not  so  in  effect,  however,  for  such  is 
human  nature  that  one  resisted  claim  overbalances  in  public 
estimation  a hundred  which  have  been  settled  not  only  without 
friction,  but  even  with  liberality. 


YALE  INSURANCE  LECTURES. 


59 


As  we  have  seen,  there  are  various  portions  of  the  policy 
which  may  be  modified  by  special  written  agreements  with 
the  assured,  called  endorsements.  Any  of  the  numerous  pro- 
hibitive clauses  in  lines  n to  30  may  be  waived  in  this  way. 
So  also  with  the  excepted  articles  noted  in  lines  30  to  44.  The 
most  important  alterations  in  the  contract,  however,  and  those 
most  generally  in  use  are  the  ones  which  refer  to  interests  of 
mortgagees  and  those  which,  as  per  lines  98  and  99,  concern 
the  extent  of  the  application  of  the  policy  or  its  measure  of 
contribution.  The  policy  provides  that,  as  to  the  creditor 
interest,  the  contract  shall  apply  as  may  be  expressed  in  the 
written  clause  referring  thereto.  The  ordinary  way  of  recog- 
nizing a mortgagee’s  or  creditor’s  interest  is  to  issue  the  policy 
to  the  owner  and  then  endorse  upon  it  “loss,  if  any,  under 
this  policy  payable  to  John  Smith,  mortgagee,  as  his  interest 
may  appear.”  When  a loss  occurs  under  a policy  with  this 
clause  the  amount  of  it  is  settled  with  the  owner,  but  payment 
must  be  first  made  to  the  payee,  i.  e.,  the  mortgagee,  until  his 
interest  is  satisfied,  or  unless  he  consents  to  allow  payment  to 
the  owner,  as  he  usually  will  do  when  the  loss  is  small.  Since, 
however,  many  loaners  need  and  demand  absolute  security, 
it  is  a very  common  practice  to  attach  printed  mortgage 
clauses  similar  to  the  sample  blank  before  you,  marked 
Standard  Mortgage  Clause. 

This  clause  practically  waives  all  rights  of  the  insurance 
company  as  far  as  the  payee  is  concerned.  He  may  collect 
his  due,  even  if  it  can  be  proven  that  the  owner,  that  is,  the 
assured,  has  fired  the  property  himself  or  if  he  has  violated 
every  condition  of  the  policy.  The  only  protection  for  the 
insurance  company  in  those  cases  where  the  policy  itself  has 
been  made  void,  but  where  nevertheless  payment  must  be 
made  to  the  creditor,  is  a provision  that  the  claim  of  the 
creditor  becomes  the  property  of  the  insurance  company  and 


6 o 


YALE  INSURANCE  LECTURES. 


may  be  enforced  by  it  against  the  debtor  if  collectible.  This 
right  of  subrogation,  as  it  is  called,  is  frequently  taken  advan- 
tage of  by  companies  and  in  some  instances  enables  them  to 
recover  a loss  which  they  have  paid  under  such  conditions. 
The  mortgage  clause  also  imposes  certain  responsibilities  upon 
the  mortgagee  in  case  violations  of  policy  conditions  occur 
with  his  knowledge. 

The  clauses  referring  to  the  extent  of  the  application  or 
contribution  of  policy  are  more  difficult  to  briefly  explain  or 
to  be  readily  comprehended.  Before  discussing  those  clauses 
at  all,  it  may  be  helpful  to  make  a few  preliminary  observa- 
tions. 

Where  there  is  little  or  no  protection  against  fire,  that  is, 
no  local  means  of  extinguishing  fires,  as  in  the  case  of  village 
stores  or  shops,  or  where,  for  any  other  reason,  the  property 
to  be  insured  is  thought  to  be  subject  to  great  or  total  loss 
should  a fire  once  start,  the  interest  of  the  insurance  companies 
leads  them  to  limit  the  amount  of  insurance  (as  compared  with 
the  value  of  the  property  insured)  which  may  be  carried  or 
recovered  in  event  of  loss.  This  is  done  in  order  that  the  in- 
terest of  the  owner  in  preserving  the  property  may  be  so 
strong  that  the  utmost  watchfulness  and  careful  attention  will 
be  observed  by  him.  It  is  evident  if,  in  the  event  of  fire,  he  is 
likely  to  suffer  a severe  loss  over  and  above  his  insurance, 
he  will  have  a much  stronger  incentive  to  guard  his  prop- 
erty from  fire  than  if  it  were  insured  for  its  full  value.  For 
a similar  purpose  companies  find  it  necessary  to  limit  the 
percentage  of  insurance  to  be  carried  in  certain  States  or  dis- 
tricts where  conspicuous  or  abnormally  heavy  burning  ratios 
indicate  unusual  carelessness,  unsatisfactory  protection,  or 
dangerous  methods  of  construction.  In  other  words,  the 
greater  the  danger  of  total  loss  the  stronger  pecuniary  inter- 
est the  owner  should  have  in  the  preservation  of  his  property. 


YALE  INSURANCE  LECTURES.  6 I 

On  the  other  hand,  where  there  is  efficient  fire  protection,  as 
in  most  large  cities,  or  where  a policy  covers  in  several  dis- 
tinct locations,  or  on  property  which  is  not  readily  suscepti- 
ble to  damage,  as  for  instance,  bar-iron,  there  is  a reasonable 
prospect  that  fires  will  be  extinguished  before  a large  portion 
of  the  property  involved  is  destroyed.  In  such  cases,  there- 
fore, insurance  companies  naturally  desire  that  a large  pro- 
portion of  the  value  should  be  covered  by  insurance  in  order 
that  a moderate  loss  of  property  shall  cause  only  a moderate 
loss  to  the  insurance  company.  In  the  unprotected  village 
any  loss  is  likely  to  be  a total  one.  In  the  protected  city 
almost  all  losses  are  partial,  and  insurance  companies  try  to 
adapt  their  methods  to  the  varying  conditions. 

Where  it  is  desired  to  limit  the  amount  of  insurance,  the 
New  York  law  permits  the  use  of  the  clause  known  as  the 
“percentage  value  clause/’  a copy  of  which  is  before  you. 
This,  as  may  be  seen  at  a glance,  prevents  the  assured  from 
recovering  more  than  a certain,  usually  75  per  cent,  of  the 
value  of  the  property  insured.  If  by  mistake  he  has  been 
carrying  insurance  exceeding  that  amount,  he  is  entitled  to  a 
return  of  the  premium  paid  on  the  excess  over  the  percentage 
which  the  clause  fixes  as  a limit  to  recovery.  By  far  the 
greater  amount  of  insurable  property  is  located  under  more 
or  less  efficient  fire  protection  and  consequently  the  limitation 
clauses  are  not  used,  but  instead,  where  possible — for  in  some 
States  the  law  stands  in  the  way — what  is  commonly  known 
as  the  co-insurance  clause  is  used.  This  clause  is  also  before 
you.  It  provides  in  the  words  of  Mr.  F.  C.  Moore,  “that 
whatever  percentage  of  the  property  is  destroyed — one-quarter, 
one-half  or  three-quarters,  as  the  case  may  be — that  percentage 
of  the  insurance  is  payable;”  or,  as  Mr.  E.  F.  Beddall  states 
the  case,  “it  (the  clause)  leaves  the  insured  free  to  carry 
as  much  or  as  little  insurance  as  he  deems  needful,  but  it 


62 


YALE  INSURANCE  LECTURES. 


fixes  the  proportion  of  the  loss  recoverable  from  the  company 
in  the  event  of  fire,  to  such  as  the  assured  has  chosen  to  pay 
for.  If  he  insures  for  one-half  of  the  value  he  recovers  one- 
half  of  the  loss,  be  it  partial  or  total;  if  the  whole  of  the 
value,  the  whole  of  the  loss.  There  is,  there  can  be,  no  in- 
equity in  this.” 

Still  another  statement  of  its  effect  may  be  made  as  follows : 
In  order  that  the  assured  may  secure  indemnity  for  the  whole 
of  any  large  or  small  loss  he  may  sustain,  he  must  carry  in- 
surance equal  to  the  full  value  of  the  property  involved. 
Usually  a percentage  co-insurance  clause  is  used,  which  makes 
some  given  per  cent,  of  the  value  of  the  property,  ordinarily 
80  per  cent.,  the  amount  which  the  insured  must  carry  in 
order  to  secure  in  all  cases  full  benefit  of  his  insurance.  Fail- 
ing so  to  do,  he  can  recover  only  such  proportion  of  any 
loss  amounting  to  less  than  80  per  cent,  of  the  value  of  the 
property  insured,  as  the  amount  of  insurance  he  actually  car- 
ries bears  to  80  per  cent,  of  the  value.  Thus,  if  the  value 
is  $10,000  and  the  insurance  $5,000,  he  can  recover  but  five- 
eighths  of  any  loss  which  amounts  to  less  than  $8,000;  that 
is,  of  any  loss  which  amounts  to  less  than  80  per  cent,  of  the 
$10,000.  When,  however,  the  assured  carries  insurance  equal 
to  80  per  cent,  of  the  value  of  the  property  covered,  the  80 
per  cent,  co-insurance  clause  is  of  no  effect.  The  assured 
in  such  cases  will  receive  the  entire  amount  of  his  loss,  be  it 
large  or  small,  not  exceeding,  of  course,  the  amount  of  the 
policy.  This  should  be  carefully  noted,  for  many  people 
labor  under  the  impression  that  where  such  a clause  is  used 
only  80  per  cent,  of  any  loss  can  be  collected. 

The  co-insurance  clause  is  even  more  important  as  a factor 
in  the  problem  of  making  rates  or  prices,  as  we  shall  see  when 
discussing  that  subject.  Where  this  clause  is  used  in  a policy 
a reduction  in  price  is  made  as  compared  with  policies  cover- 


YALE  INSURANCE  LECTURES. 


63 


ing  similar  property  similarly  located,  but  without  the  co-in- 
surance clause.  In  fact,  this  clause  is  often  called  the  reduced 
rate  clause  in  States  where  the  law  has  not  given  it  a name. 

In  some  parts  of  the  country,  for  instance  Indian  Territory, 
Texas  and  Arkansas,  where  fires  have  occurred  with  abnormal 
frequency,  and  particularly  on  certain  classes  in  those  sections, 
such  as  cotton  gins,  which  are  extremely  liable  to  fire  on 
account  of  the  inflammable  nature  of  the  cotton  and  the 
process  to  which  it  is  subjected,  the  percentage  value  clause 
is  sometimes  replaced  by  what  is  known  as  the  “three-quar- 
ters loss  clause/’  which  provides  that  the  property  owner  shall 
suffer  one-quarter  of  any  loss,  great  or  small,  which  may 
occur  to  his  property.  This,  of  course,  is  used  for  the  same 
reasons  that  prompt  the  use  of  the  percentage  value  clause, 
but  is  much  more  radical.  And,  as  a further  precaution,  there 
is  embraced  in  policies  covering  mercantile  and  manufacturing 
property  in  States  with  a bad  fire  history,  clauses  making  the 
policies  void  unless  the  assured  shall  keep  an  accurate  set  of 
books,  take  an  annual  inventory,  and  either  keep  both  books 
and  inventory  in  a fire-proof  safe,  or  in  a place  where  they 
will  not  be  endangered  by  fire  in  a building  where  insurance 
covers.  This  clause  is  known  as  the  “iron-safe  clause,”  and 
is  intended  to  bar  out  from  the  protection  of  insurance  poli- 
cies the  shiftless  and  careless  dealers  and  manufacturers  who 
abound  in  many  of  the  smaller  towns,  especially  in  the  South- 
west. It  also  insures  a more  satisfactory  and  intelligent  loss 
settlement,  should  a loss  occur,  than  is  possible  in  those  cases 
where  the  entire  property  is  destroyed  and  no  record  of 
quantities  or  of  transactions  is  preserved. 

Still  another  clause  used  to  govern  the  application  of  the 
policy  is  one  known  as  the  distribution  average  clause.  This 
clause  provides  that  the  amount  of  insurance  shall  attach  in 
each  of  two  or  more  locations  according  to  the  value  in  each. 


64 


YALE  INSURANCE  LECTURES. 


For  instance,  a merchant  may  have  his  merchandise  in  three 
locations — in  his  store  where  it  is  to  be  sold;  in  his  ware- 
house, where  he  keeps  a surplus  stock,  and  in  the  freight  depot 
of  the  railway  or  steamship  line  by  which  he  receives  it.  As 
business  progresses  his  merchandise  is  constantly  shifted.  One 
day  two-thirds  will  be  in  his  store;  on  another  day  one-half 
in  his  warehouse;  on  still  other  days  he  may  have  none  at 
all  in  the  freight  depot.  If  he  insures  his  stock  under  a policy 
with  the  distribution  average  clause,  the  policy  will  auto- 
matically divide  itself  as  the  stock  is  divided  from  day  to  day. 
If  one-third  of  the  value  is  in  the  warehouse  so  will  one- 
third  of  the  policy  cover  there.  If  the  warehouse  is  empty 
the  policy  will  apply  only  in  the  store  and  freight  house.  And 
also  that  part  of  the  policy  which  covers  at  each  location  will 
be  equal  to  the  fraction  of  the  total  value  of  the  property 
at  each  location. 

Various  other  clauses  are  used  by  companies  to  further  the 
convenience  of  different  patrons,  or  to  provide  against  the 
contingencies  which  arise  in  different  parts  of  the  country,  but 
the  foregoing  are  the  principal  clauses,  the  others  being  more 
seldom  used. 

Policies  are  said  to  be  specific  when  they  cover  on  one  kind 
of  property  or  in  one  definite  location;  floating  when  they 
cover  under  one  division  property  located  at  a number  of 
different  locations;  general  when  they  cover  several  kinds  of 
property  under  different  items  at  one  location;  concurrent 
when  they  agree  exactly  as  to  their  wording  and  as  to  the 
kind  of  property  covered;  perpetual  when  their  duration  is 
without  limit,  except  by  cancellation. 

These  perpetual  policies  originated  in  Philadelphia,  where 
they  are  chiefly,  if  not  solely,  used. 

It  will  be  remembered  that  one  of  the  earliest  companies 
issued  policies  for  seven  years  in  consideration  of  a deposit  by 


Y*ALE  INSURANCE  LECTURES. 


65 


the  assured,  and  that  the  deposit  was  to  be  returned  to  the 
assured  at  the  expiration  of  the  policy.  It  was  a very  natural 
process  to  agree  with  the  assured  to  retain  this  deposit  in- 
definitely, thus  extending  the  term  of  the  insurance  and  mak- 
ing it  perpetual. 

As  we  have  seen  heretofore,  eight  other  States  have  pre- 
scribed the  New  York  standard  policy,  and  again,  seven  States 
have  adopted  standard  policy  forms  of  their  own,  each  differ- 
ing from  the  other  and  all  from  the  New  York  form.  It 
follows  that  every  company  which  does  a widely  extended  busi- 
ness must  keep  in  stock  at  least  eight  different  kinds  of  poli- 
cies. Moreover,  since  some  of  the  States  permit  any  form  of 
endorsement  clause  which  does  not  conflict  with  the  policy  in 
use  in  that  State,  while  others,  like  New  York,  permit  only 
clauses  which  have  been  specifically  authorized  by  law  or 
passed  upon  by  the  insurance  official  of  the  State,  it  will  be 
seen  that  companies  are  compelled  to  have  and  use  a very 
great  number  of  different  clauses.  In  fact,  it  requires  a very 
considerable  amount  of  study  and  a good  memory  for  any 
one  person  to  be  able  to  keep  in  touch  with  the  widely  dif- 
fering State  requirements  as  to  policy  forms  and  their  attend- 
ant clauses.  Such  unnecessarily  and  often  injuriously  diver- 
gent laws  entail  great  expense  and  labor  on  the  companies, 
and  neither  they  nor  the  insuring  public  benefit  therefrom.  It 
cannot  be  doubted  that  one  simple  form  of  policy  and  one  set 
of  appropriate  clauses  would  be  better  for  all  concerned. 


5 


Organization  and  Methods 

DIFFERENT  KINDS  OF  MUTUALS—  TAXA- 
TION OF  COMPANIES 

BY  RICHARD  M.  BISSELL 

In  a general  way  it  may  be  said  that  fire  insurance  is  trans- 
acted through  three  different  agencies,  the  first  and  most 
important  of  which  is  the  stock  companies;  the  second,  the 
various  forms  of  mutual  companies,  and  the  comparatively 
unimportant  third,  the  association  of  individual  insurers  known 
as  individual  underwriters  and  Lloyds.  Mutual  companies 
again  may  be  divided  into  three  classes — first,  the  local 
county  or  town  mutuals ; second,  the  state  or  general  mutuals, 
and  third,  the  manufacturers  mutuals  commonly  known  as  the 
factory  mutuals  and  their  imitators. 

The  local  or  county  mutuals  are  by  far  the  most  numer- 
ous of  any  class  of  companies  in  the  United  States.  Their 
number  is  approximately  1,500.  There  are  125  in  New  York 
State  alone. 

The  laws  which  govern  their  organization  and  operation  are 
very  dissimilar  in  the  different  States.  In  some  States,  notably 
in  New  York,  they  are  prohibited  from  operating  in  large 
cities.  This  is,  in  New  York  at  least,  a result  of  the  great 
fire  of  1845,  when  all  existing  mutual  companies  doing  busi- 
ness in  New  York  City  were  bankrupted.  Usually  their  opera- 
tions are  limited  by  law  to  a few  non-hazardous  classes — such 
as  farm  property,  dwellings,  churches  and  stores — in  a given 
limited  district.  Often  their  operations  are  confined  to  a town 
or  county,  though  in  New  York  State  a local  mutual  company 
may  operate  throughout  five  counties. 


YALE  INSURANCE  LECTURES. 


6 7 


As  a rule  they  must  have,  before  organization  is  perfected, 
applications,  i.  e.,  promises  for  a certain  amount  of  insurance, 
usually  somewhere  between  $50,000  and  $200,000,  already  on 
file,  and  a portion  of  the  premiums  therefor — commonly  25 
per  cent. — paid  in  advance  in  cash. 

Having  secured  the  necessary  applications,  those  who  are 
organizing  the  company — usually  a group  of  farmers,  who 
think  the  charges  of  the  stock  companies  are  exorbitant — 
secure  from  the  State  authorities  the  proper  papers  of  incor- 
poration; then  a meeting  of  the  applicants  or  members  is 
called  and  officers  are  elected.  Business  is  then  begun  by 
issuing  their  policies  to  the  original  applicants.  In  most 
cases  all  the  work  of  the  company  is  done  by  the  secre- 
tary, who  very  likely  is  the  village  postmaster,  store-keeper 
or  bank  cashier,  and  who  receives  a fee  for  each  policy  issued, 
or  who  may  be  compensated  by  a salary.  Those  interested 
in  the  company  urge  their  friends  and  neighbors  to  join 
them,  appreciating  the  necessity  for  a considerable  number 
of  policy-holders  amongst  whom  the  losses  may  be  divided. 
The  applications  thus  secured  are  usually  passed  upon  as  to 
valuations,  desirability,  etc.,  by  the  executive  committee  or 
board  of  directors.  If  an  application  is  approved  a policy  is 
issued  by  the  secretary,  and  perhaps  signed  by  one  or  two  of 
the  committee.  These  policies  are  issued  in  consideration  of 
a small  cash  payment,  equal  to  about  one-fourth  the  price  com- 
monly charged  by  stock  companies,  and  a note  given  by  the 
applicant  for  an  amount  equal  to  three  or  four  times  the  cash 
payment.  These  notes  are  subject  to  call  if  the  needs  of  the 
company  so  require.  Each  policy-holder  is  liable  for  the 
losses  of  the  company,  according  to  the  articles  of  agreement 
or  incorporation  or  the  by-laws  of  the  particular  company 
in  which  he  is  insured,  or  perhaps  according  to  an  agreement 
assented  to  when  the  policy  is  issued.  Sometimes  the  limit  of 


68 


YALE  INSURANCE  LECTURES. 


liability  is  stated  in  the  policy.  In  some  cases  each  policy- 
holder is  liable  for  his  fractional  share  of  any  or  all  liabilities 
which  may  come  to  the  company.  More  often,  however,  this 
liability  is  limited  to  a certain  percentage  of  the  amount  of 
insurance  the  individual  carries  or  to  some  multiple  of  the 
amount  for  which  he  has  given  premium  notes.  The  policies 
are  usually  issued  for  five  years. 

Since  the  executive  committee  and  all  the  applicants  are 
neighbors  and  acquaintances,  the  personal  and  financial  quali- 
fications of  every  applicant,  as  well  as  the  value  and  condi- 
tion of  his  property,  are  well  known,  and  thus  the  danger  from 
dishonest  losses  or  over-valuation  is  reduced  to  a minimum. 
No  man  with  a bad  reputation  can  secure  insurance  in  one 
of  these  institutions,  if  it  is  properly  conducted.  Moreover, 
every  policy-holder  is  constantly,  as  it  were,  under  the  sur- 
veillance of  his  neighbors,  who  are  members — many  of  them — 
of  the  same  company;  consequently  the  opportunities  for  the 
successful  perpetration  of  fraud  are  not  good.  Furthermore, 
while  in  many  rural  communities  it  is  considered  a very  clever 
business  stroke  to  get  the  better  of  one  of  the  large  stock 
companies,  who,  like  the  railroads,  are  looked  upon  as  natural 
enemies,  it  is  an  entirely  different  matter  when  a man’s  desire 
to  realize  on  his  policy  results  in  an  assessment  upon  his 
neighbor.  An  attempt  to  do  so,  whether  successful  or  not, 
usually  results  in  ostracism  for  the  offender. 

These  companies,  when  wisely  and  honestly  managed,  suc- 
ceed or  fail  according  to  the  burning  record  of  the  districts 
where  they  operate.  A few  heavy  losses  in  the  earlier  years 
of  their  existence  usually  finish  them.  Farmers  and  villagers 
quickly  tire  of  assessments.  On  the  other  hand,  in  those  dis- 
tricts which  have  had  favorable  records  as  to  fires — and  there 
are  many  such — these  little  companies  live  and  prosper  for 
years.  Often  they  accumulate  assets  of  considerable  value  and 


YALE  INSURANCE  LECTURES.  69 

in  such  cases  furnish  indemnity  to  their  members  at  very 
low  cost.  Having  no  expense  of  any  kind  save  the  fees  of  the 
secretary  and  the  cost  of  their  few  supplies,  they  can  be  very 
economically  operated.  Whether  their  record  as  a whole 
has  been  one  of  profit  or  loss  to  their  members  cannot  be  said 
with  any  degree  of  certainty.  Large  numbers  are  organized 
and  equally  large  numbers  fail  every  year,  and  while  many 
are  short-lived,  some  exist  to-day  which  are  fifty  years  or  more 
old.  Their  strength  and  their  weakness  alike  are  largely  due 
to  the  fact  that  they  transact  business  in  a very  limited  field, 
where  every  risk  is  known  and  watched,  but  where  a few 
losses  make  insurance  very  costly  owing  to  the  limited  number 
of  those  among  whom  the  losses  are  distributed.  They  are 
usually  free  from  the  heavy  burden  of  taxation  which  rests 
upon  stock  companies,  being  thus  favored  by  that  policy  of 
discrimination  on  the  part  of  the  legislator  which  so  often  is 
in  evidence  where  the  farmer  or  laboring  man  is  concerned. 

Concerning  the  formation  of  the  mutual  companies  which  do 
a general  business  throughout  one  or  more  States  and  which 
are  usually  called  State  Mutuals  to  distinguish  them  from 
County  and  Town  Mutuals,  the  laws  of  the  different  States 
vary  to  an  extreme  degree.  In  New  York  and  some  other 
States  there  are  no  laws  whatever  governing  or  controlling 
such  companies..  In  others,  as  for  instance  Wisconsin,  the 
laws  are  specific  and  minute.  On  the  whole,  the  most  marked 
difference  between  these  laws  and  those  which  govern  the 
town  mutuals  concern  the  amount  of  applications  for  insur- 
ance which  must  be  secured  before  a charter  can  be  had.  In 
Wisconsin  this  amount  is  $750,000  as  compared  with  $50,000 
for  a local  mutual  company.  In  some  States  the  classes  of 
business  which  these  States  Mutuals  may  write  are  limited  by 
law ; in  others  the  maximum  amount  of  liability  which  may 
be  assumed  on  any  one  risk  is  so  fixed.  The  Wisconsin  law  is 


70 


YALE  INSURANCE  LECTURES. 


remarkable  for  providing  specifically  for  five  kinds  of  mutual 
companies  which  may  transact  business  over  an  extended 
territory.  Among  them  are  companies  formed  by  retail  lumber 
dealers,  hardware  dealers,  church  societies,  and  finally  a class 
unique  in  insurance  history  so  far  as  I know,  viz.,  mutual  com- 
panies formed  by  the  treasurers  of  county  insane  asylums  and 
poorhouses. 

These  general  or  state  mutuals  have  not  on  the  whole  been 
successful,  for,  having  ordinarily  no  great  strength  of  assets, 
they  cannot  command  business  in  districts  remote  from  their 
place  of  domicile,  except  by  quoting  dangerously  low  prices. 
Moreover,  they  are  compelled  to  delegate  to  agents  or  others 
the  power  to  select  risks  and  do  not  always  get  the  best  service. 
Those  who  operate  the  company  lack  the  incentive  of  profit, 
a most  important  factor. 

Such  companies  commonly  do  not  possess  and  cannot  acquire 
the  highly  trained  staff,  the  complete  organization  and  concen- 
tration of  authority  necessary  for  the  successful  prosecution 
of  a general  business  under  competitive  conditions  through- 
out a wide  territory,  and  when  such  powers  are  given  to  some 
official  of  a mutual  company,  too  often  the  trust  is  abused.  As 
long  as  the  business  grows  rapidly  and  heavy  assessments  are 
avoided — for  the  loss  ratio  on  a rapidly  growing  business  is 
always  small — the  members  are  not  likely  to  interest  themselves 
in  the  methods  pursued,  and  when,  after  a time,  the  assess- 
ments become  heavy  it  is  usually  too  late  to  apply  a remedy. 
The  fact  that  there  were  seventy-four  such  mutual  companies 
in  New  York  State  alone  in  1853,  and  but  two  or  three  to-day, 
is  sufficient  commentary  on  their  experience,  to  which  it  is 
perhaps  permissible  to  add  the  following  from  the  first  annual 
report  of  the  Insurance  Department  of  the  State  of  Pennsyl- 
vania, issued  in  1863 : 

“Not  a few  mutual  companies  have  been  shipwrecked  be- 
cause of  the  ambition  of  officers  to  accumulate  a large  business ; 


YALE  INSURANCE  LECTURES, 


71 


going  far  from  home ; trusting  to  agents,  and  measuring  pros- 
perity by  the  amount  at  risk  and  gross  cash  receipts. 

“Near  home,  within  the  limits  of  half  a dozen  counties, 
the  officers  and  members  are  more  or  less  intimately  ac- 
quainted with  the  character  of  those  composing  the  partner- 
ship and  the  property  at  risk;  but  far  from  home,  in  this  or 
other  States,  they  are  necessarily,  to  a great  degree,  igno- 
rant. There  the  agent  acts  for  them.  His  interest  is  to  do 
as  much  business  as  possible  and  he  is  not  always  so  critical 
as  to  the  risks  he  assumes  as  he  ought  to  be.  In  time,  loss 
after  loss  is  followed  by  assessment  upon  assessment,  until 
the  home  members  of  the  company  find  that  the  insurance 
which  ought  to  have  been  cheap  has  turned  out  very  dear. 
The  cause  of  the  disaster  is  very  plain.  The  laws  essential 
to  cheap  insurance  have  been  set  at  defiance.  Hazardous  and 
special  risks  have  been  written  at  rates  far  less  than  the 
stock  companies  could  afford,  as  if  the  mutual  system  contained 
within  itself  an  exemption  from  the  inevitable  laws  of  hazard. 
The  officers  of  the  company  attribute  their  misfortunes  to 
an  unprecedented  run  of  ill  luck.  Mere  chance  played  the 
smallest  part  in  producing  the  catastrophe;  want  of  knowl- 
edge and  judgment  the  largest.  Then  comes  the  trouble.  The 
policy-holders  rebel  against  the  payment  of  the  large  assess- 
ments. The  company  resorts  to  litigation  to  compel  payment. 
They  are  pressed  to  pay  losses  and  are  compelled,  in  turn, 
to  press  the  payment  of  assessments.  The  practical  useful- 
ness of  the  company  is  at  an  end  and  its  career  is  terminated 
amid  the  execrations  of  all  parties  interested.,, 

It  is  true  that  there  are  throughout  the  country  a number 
of  fortunately  prosperous  old  institutions  of  this  kind  which 
have  been  conservatively  managed,  have  transacted  a selected 
business  only  of  the  non-hazardous  classes  and  have  confined 
their  operations  almost  invariably  to  limited  territory.  These 


72 


YALE  INSURANCE  LECTURES. 


institutions  have  had  honorable  careers,  and  have  furnished 
cheap  indemnity. 

In  life  insurance  the  policy-holder  looks  to  the  company 
for  a certain  definite  payment  at  some  time  in  the  future, 
and,  so  far  as  experience  shows,  runs  little  if  any  risk  of 
personal  liability  by  becoming  a member  of  a mutual  company. 
In  fire  insurance,  however,  the  policy-holder  contracts  for 
indemnity  against  an  extraordinary  and  even  unlikely  loss, 
and  yet  by  joining  a mutual  company  he  exposes  himself  to 
the  possibility  of  a serious  personal  liability,  in  the  event  of 
a conflagration,  or  if  the  bad  selection  of  risks  results  in 
heavy  losses.  Instances  have  occurred  where  former  policy- 
holders have  been  assessed  as  late  as  five  years  after  their  own 
policies  had  expired,  and  long  after  they  supposed  their  con- 
nection with  the  mutual  company  of  which  they  had  been 
members  had  ceased. 

We  now  come  to  the  consideration  of  the  most  interesting, 
and,  so  far  as  their  influence  on  the  methods  of  fire  insurance 
companies  and  on  the  fire  loss  of  the  country  is  concerned, 
by  far  the  most  important  class  of  mutual  companies,  viz., 
those  known  as  the  factory  mutuals. 

Edward  Atkinson,  LL.D.,  one  of  their  most  eminent  officials 
and  advocates,  is  authority  for  the  statement  that  this  class 
of  companies  was  devised  for  the  prevention  of  loss  by  fire,  the 
payment  of  indemnity  for  losses  sustained  being  a secondary 
matter. 

Theoretically  speaking,  insurance  companies  pure  and  simple 
have  nothing  to  do  with  the  prevention  or  extinguishment  of 
fires,  or  with  the  reduction  of  the  fire  waste.  Their  province 
is  merely  to  distribute  the  losses  which  fires  cause.  Despite 
this  truth,  it  was  a short-sighted  business  policy  which  pre- 
vented the  stock  companies  from  actively  cooperating  with 
factory  owners,  especially  with  cotton  and  woolen  manufac- 


YALE  INSURANCE  LECTURES. 


73 


turers,  who,  when  the  burning  ratio,  and  hence  the  cost  of 
indemnity,  had  risen  to  an  unbearable  extent,  sought  so  to 
improve  their  property  as  to  reduce  the  number  and  amount 
of  losses  and  so  indirectly  the  cost  of  insurance.-  It  seems 
to  be  true,  however,  that  the  failure  or  absence  of  such  coop- 
eration was  largely  responsible  for  the  origin  of  this  class  of 
factory  mutual  companies,  whose  methods  as  first  practiced 
by  themselves,  later  by  the  stock  companies,  have  fairly  revo- 
lutionized methods  of  protection  against  fire  and  made  possi- 
ble greatly  reduced  rates  for  risks  of  all  classes  when  prop- 
erly protected. 

The  first  of  these  companies  was  organized  in  1835  by 
Zachariah  Allen  in  Providence,  Rhode  Island,  and  was  called 
the  Providence  Manufacturers’  Mutual  Company.  In  1850 
there  were  three  of  these  companies,  and  the  number  had  in- 
creased to  seven  in  i860.  There  are  now  in  Rhode  Island  and 
Massachusetts  eighteen  such  companies  in  active  operation, 
and  others  in  Pennsylvania  and  other  parts  of  the  country. 
These  companies  are  carrying  insurance  amounting  to  over 
one  billion  of  dollars  on  factory  property. 

The  activity  of  these  companies  was  greatly  increased  and 
the  expansion  of  their  operations  greatly  aided,  by  the  material 
advances  in  rates  which  were  made  by  the  surviving  stock 
companies  after  the  Chicago  and  Boston  conflagrations.  These 
advances,  amounting  to  56  per  cent,  or  more,  compelled  fac- 
tory owners  to  look  about  for  less  costly  sources  of  indemnity, 
with  the  result  that  many  of  them  adopted  factory  mutual 
methods  of  protection  and  secured  the  low  cost  insurance 
resulting  therefrom. 

From  the  outset  these  companies  have  endeavored,  first,  to 
ascertain  and  eliminate  the  causes  of  fires,  and,  second,  to 
provide  such  ample  protection  that  any  fire  which  might  occur 
should  be  extinguished  with  but  slight  loss. 


74 


YALE  INSURANCE  LECTURES. 


In  these  particulars  the  record  of  the  Associated  New  Eng- 
land Factory  Mutual  Companies  has  been  quite  wonderful. 
Their  method  is  to  charge  a cash  premium  based  upon  the 
class  of  work  done,  construction  of  the  building  in  question, 
the  extent  to  which  dangerous  processes  are  eliminated,  and 
the  extent  and  efficiency  of  the  apparatus  for  extinguishing 
fires.  No  factory  can  secure  the  protection  of  this  system 
unless  in  respect  to  all  these  matters  it  comes  up  to  a pre- 
scribed standard  of  excellence.  In  addition  to  this  cash  pay- 
ment, a liability  for  assessments  equal  to  five  times  the  cash 
premium  is  assumed  by  the  policy-holder.  As  a matter  of 
fact,  however,  since  1850  no  assessment  has  been  found  neces- 
sary by  any  of  the  New  England  companies.  On  the  other 
hand,  the  cash  premiums  have  not  only  paid  losses  and  ex- 
penses, but  have  enabled  a division  of  profits  to  be  made 
at  the  close  of  each  year.  In  this  way  the  actual  cost  of 
indemnity  is  reduced  to  a small  amount. 

Mr.  Atkinson  ascribes  the  success  of  these  companies  to 
recognition  of  the  following  principle:  “The  only  persons 
who  can  prevent  loss  by  fire  are  the  owners  or  occupants 
of  the  insured  premises.  Upon  them  rests  the  responsibility 
for  heavy  loss,  if  any  occurs,  in  nearly  every  fire.  All  that 
the  insurance  company  can  do  is  to  pay  indemnity  for  loss 
which,  if  large,  in  nine  cases  out  of  ten,  is  due  to  the  lack 
of  apparatus  for  preventing  loss  or  to  the  lack  of  care  and 
order  in  the  conduct  of  the  work.” 

In  their  efforts  to  ascertain  and  eliminate  the  causes  of 
fire,  these  companies  have  investigated  and  endeavored  to  safe- 
guard all  processes  used  in  manufacture.  They  have  investi- 
gated methods  of  illuminating,  heating,  lubricating;  have 
devised  elaborate  plans  for  the  safe  construction  and  arrange- 
ment of  factories  in  order  that  the  spread  of  fire  might  be 
retarded  and  that  especially  dangerous  processes  might  be 


YALE  INSURANCE  LECTURES. 


75 


isolated,  and,  finally,  have  tested  and  applied  the  most  mod- 
ern and  approved  apparatus  for  extinguishing  fires.  More- 
over, when  a factory  comes  into  their  membership  they  not 
only  see  to  it  that  in  all  respects  its  condition  is  brought  up  to 
their  requirements,  but  by  frequent  inspection  they  secure 
the  constant  maintenance  of  such  conditions.  They  are,  in- 
deed, hardly  to  be  called  insurance  companies  at  all,  but 
rather  associations  of  manufacturers  with  experienced  in- 
spectors and  engineers,  whose  work  it  is  to  eliminate  the  pos- 
sibility of  loss  or  serious  damage  by  fire.  The  insurance 
feature  only  comes  into  play  when,  despite  their  precautions, 
a damage  is  incurred.  It  will  be  realized  that,  though  the 
number  of  fires  and  the  loss  resulting  therefrom  have  been  very 
greatly  reduced  by  these  methods,  a large  expenditure  is  neces- 
sary to  construct,  arrange  and  equip,  a factory  in  such  a way 
as  to  bring  it  up  to  the  standard  of  their  requirements. 

While  to  these  factory  mutuals  must  be  given  the  chief 
credit  for  inaugurating  such  plans  for  safeguarding  property, 
the  stock  companies  have  for  a number  of  years  been  pursuing 
methods  of  cooperation  with  the  owners  of  factories,  and 
other  classes  of  property  as  well,  similar  to  those  briefly  hinted 
at  above,  and  now  are  as  well  equipped  as  the  factory  mutual 
companies  to  make  suggestions  to  property  owners  for  the 
proper  construction,  arrangement,  care  and  protection  of  their 
property. 

The  properties  thus  equipped  in  accordance  with  the  views 
of  experts  are  called  “protected”  or  “equipped”  risks,  and 
there  exists  the  keenest  rivalry  between  the  factory  mutual 
companies  and  the  stock  companies  to  secure  the  control  of 
this  class  of  business.  Thus  far  the  efforts  of  the  mutual 
companies  have  been  the  more  successful,  especially  in  New 
England,  though  the  stock  companies  are  gradually  reducing 
their  rates  to  a point  where  they  approximate  the  low  cost  at 
which  the  factory  mutuals  have  been  able  to  furnish  indemnity. 


76 


YALE  INSURANCE  LECTURES. 


There  is  no  reason  why  this  class  of  mutual  companies 
should  not  combine  to  prosper  if  they  continue  to  confine  their 
field  to  isolated  and  thoroughly  protected  factories,  the  hazards 
of  which  have  been  properly  provided  for. 

Mr.  Atkinson,  in  regard  to  this  matter,  says,  “the  method 
of  granting  contracts  by  the  factory  mutual  companies  must 
of  necessity  be  limited  to  special  establishments,  each  care- 
fully guarded  from  the  other  and  fitted  with  its  own  apparatus 
for  the  extinction  of  fire.”  “The  mutual  contract  cannot  safely 
be  adopted  in  the  crowded  districts  of  large  cities  for  the 
reason  that  the  owner  or  occupant  of  one  building  may  have 
a very  dangerous  neighbor  in  the  next,  over  which  he  has 
no  control.” 

There  are  two  factors  unfavorable  to  this  class  of  companies ; 
first,  the  possibility  that  too  extensive  liability  as  compared  with 
the  income,  may  be  assumed  on  individual  risks,  owing  to 
implicit  reliance  on  the  experience  already  gained,  in  which 
case  dangerously  large  losses  may  be  incurred ; and,  second,  the 
growing  competition  of  the  stock  companies  for  the  pro- 
tected risks,  which  is  constantly  becoming  keener.  The  stock 
companies  have  two  important  advantages  to  offer  their 
patrons : first,  that  their  policies  are  issued  at  net  cost  instead 
of  in  consideration  of  a cash  payment  to  be  later  reduced  by 
dividends;  second,  that  no  liability  whatever  is  assumed  by 
the  policy-holder. 

Insurance  organizations  of  another  class  have  flourished  in 
great  numbers  during  the  past  ten  or  fifteen  years.  These 
are  known  for  the  most  part  as  Lloyds  of  one  kind  or  another. 
They  are  voluntary  partnerships  for  the  purpose  of  insuring 
property.  As  a rule  each  partner  is  liable  for  a certain  por- 
tion of  every  loss  which  occurs.  The  name  Lloyds  is,  of 
course,  taken  from  the  famous  English  institution,  and  is  too 


YALE  INSURANCE  LECTURES. 


77 


often  used  in  order  to  convey  the  impression  that  these  new 
American  concerns  are  comparable  in  point  of  resources  and 
reliability  with  that  office.  As  a matter  of  fact  very  few  in- 
deed of  the  so-called  Lloyds  in  this  country  are  in  a position 
to  offer  reliable  contracts  of  indemnity.  They  furnish  the 
combined  promises  of  a number  of  private  individuals,  and 
the  value  of  the  contract  in  most  cases  is  entirely  dependent 
upon  the  financial  strength  of  these  individuals,  though  in  a 
few  instances  a guarantee  fund  is  paid  in,  which  is  liable  for 
claims.  Some  of  these  concerns  are  responsible  and  have 
honestly  and  promptly  paid  their  losses.  Most  of  them,  how- 
ever, are  without  any  of  the  qualities  which  a company  trans- 
acting an  insurance  business  should  possess,  and  not  a few  are 
operated  solely  in  order  to  get  possession  of  premiums,  which 
are  not  by  any  means  designed  to  be  accumulated  for  the 
benefit  of  their  foolish  patrons.  One  very  frequent  feature  of 
their  contracts,  which  makes  them  without  particular  value 
in  the  congested  sections  of  large  cities,  is  the  provision  that 
in  case  of  a general  conflagration  the  liability  of  each  partner 
under  all  outstanding  contracts  shall  be  limited  to  a certain 
fixed  amount.  These  policies  are  usually  issued  through  some 
one  agent  acting  for  all  the  partners,  who,  as  a rule,  know 
nothing  about  the  transactions  in  which  their  names  and  credit 
are  involved. 

While  these  Lloyds  are  most  of  them  new  institutions — 
recent  phenomena  in  the  insurance  world — their  operations 
have  been  so  general  and  the  results  so  unsatisfactory  to  the 
public,  that  in  ten  States  laws  have  been  passed  which  re- 
quire a cash  deposit  or  capital  to  be  paid  in  by  every  such  part- 
nership as  security  for  the  fulfillment  of  their  contracts.  One 
State — Pennsylvania — prohibits  them  altogether.  In  seventeen 
States  there  are  as  yet  no  laws  applicable  to  them.  In  the  rest 
of  the  United  States  they  are,  by  the  wording  of  the  insurance 


?8 


YALE  INSURANCE  LECTURES. 


laws,  subject  to  the  same  restrictions  and  requirements  as  ordi- 
nary insurance  companies.  There  are  from  sixty  to  seventy 
of  these  Lloyds  now  in  existence  operating  in  a more  or  less 
general  way  in  the  United  States,  of  which  number  perhaps 
less  than  half  a dozen  are  responsible  and  worthy  of  a limited 
recognition.  There  is  no  way  of  ascertaining  the  volume  of 
business  which  these  institutions  transact. 

We  now  come  to  the  consideration  of  the  methods  of  in- 
corporated stock  companies,  which,  as  before  stated,  form  alto- 
gether the  most  important  class  of  insurance  companies,  both 
as  to  the  business  transacted  and  as  to  solidity  of  assets  and 
reserve,  and  which,  as  stated  in  a former  lecture,  transact  90  per 
cent,  of  all  the  business  done  in  the  United  States. 

In  the  case  of  American  companies,  at  least,  it  is  usual  for 
the  directors  to  concern  themselves  chiefly  with  the  financial 
or  banking  department  of  the  company’s  business,  largely  be- 
cause insuring  property  against  fire  is  a business  requiring 
technical  training  and  one  which  must  be  conducted  by  men 
well  versed  in  its  numerous  details.  Therefore  the  business 
of  insuring  property  is  commonly  left  to  the  officers  of  the 
company  and  their  assistants. 

The  whole  country  is  usually  divided  into  districts  or  depart- 
ments and  an  officer,  or  more  than  one,  placed  at  the  head  of 
each.  These  departments  in  some  cases  are  all  under  the  im- 
mediate supervision  of  the  chief  executive  and  located  in  the 
head  office  of  the  company.  It  is  believed  by  some  company 
officers  that  a more  consistent  policy,  a more  uniform  method 
of  procedure  and  greater  economy  of  operation  can  be  secured 
in  this  way.  The  majority  of  companies,  however,  establish 
departments  in  various  large ' cities,  each  department  having 
jurisdiction  over  the  States  naturally  tributary  to  the  city 
where  it  is  located.  These  departments  are  usually  called 
general  agencies.  The  companies  which  maintain  them  do  so 


YALE  INSURANCE  LECTURES. 


79 


because  of  the  belief  that  in  this  way  they  can  get  in 
closer  touch  with  their  various  agents  and  with  the  insuring 
public  and  therefore  can  secure  the  best  obtainable  results,  both 
as  to  the  amount  of  business  obtained  and  in  the  matter  of 
closely  supervising  it.  The  cities  usually  selected  for  depart- 
ment offices  are  New  York,  Chicago  and  San  Francisco,  and, 
to  a smaller  extent,  Boston,  Philadelphia,  Atlanta,  New  Orleans 
and  one  or  two  others. 

The  head  office  of  the  company  contains  the  department  for 
the  States  adjacent  thereto.  These  departments  are  intended  to 
thoroughly  work  the  territory  under  their  jurisdiction  accord- 
ing to  the  general  scheme  of  operations  adopted  by  the  com- 
pany. Some  companies  endeavor  to  secure  business  from  the 
larger  cities  only,  but,  both  for  the  sake  of  a larger  income 
and  because  of  the  safety  and  steadiness  which  can  only  be 
secured  from  a widely  distributed  business,  most  companies 
endeavor  to  get  business  from  all  possible  sources  where  a 
profit  is  likely. 

The  business  is  secured  by  means  of  agents  residing  in  the 
various  towns  and  villages  where  the  company  operates. 
These  are  called  local  agents.  In  large  cities,  such  as  Cleve- 
land, Rochester,  Louisville,  etc.,  these  local  agents  usually  de- 
vote their  entire  time  to  securing  and  handling  the  business 
and  often  the  same  man  or  firm  in  such  a city  will  act  as  agent 
for  anywhere  from  one  to  a dozen  insurance  companies.  In 
the  smaller  places,  however,  the  amount  of  business  to  be  done 
is  so  small  and  the  number  of  companies  desiring  it  so  large 
that  the  business  usually  demands  only  a portion  of  the  agent’s 
time,  and  is,  therefore,  combined  with  banking,  the  practice  of 
law,  store-keeping,  or  some  other  occupation.  Moreover,  the 
agent  in  such  little  places  acts  for  as  many  companies  as  he 
will  consent  to  represent. 

It  will  be  seen  that  local  agents  are  the  means  by  which 
a company  comes  into  direct  contact  with  the  insuring  public. 


8o 


YALE  INSURANCE  LECTURES. 


The  local  agents  are  the  ones  who  secure  for  the  company 
the  business  on  which  it  feeds.  They  are,  therefore,  a factor 
of  supreme  importance  in  the  business,  and  companies  en- 
deavor through  their  special  agents  and  in  other  ways  to 
maintain  cordial  and  friendly  relations  with  them.  In  order 
to  insure  success,  popularity  with  local  agents  is  quite  as  im- 
portant as  popularity  with  the  public  in  general.  In  order  that 
there  may  be  an  intimate  knowledge  of  the  business  at  each 
agency,  that  new  agencies  may  be  secured  and  unsatisfactory 
ones  discontinued,  and  to  the  end  that  all  matters  concern- 
ing the  transactions  between  local  agents  and  the  depart- 
ment office  may  be  properly  supervised,  men  called  special 
agents  are  employed,  whose  duty  it  is  to  travel  constantly 
over  the  field  to  which  they  are  assigned,  locating  agencies 
at  all  available  points,  carefully  inspecting  and  securing  accu- 
rate information  concerning  all  the  risks  which  the  company 
insures,  collecting  over-due  payments,  endeavoring  to  secure 
from  local  agents  as  much  desirable  business  as  possible,  and 
in  general  to  further  the  interests  of  the  company  in  every 
legitimate  way.  To  them  also  is  assigned  for  the  most  part 
the  duty  of  arranging  with  claimants  for  the  settlement  and 
payment  of  the  losses  which  occur  in  their  particular  terri- 
tory, though  some  companies  doing  a very  large  business 
have  so  many  losses  to  settle  that  expert  adjusters,  as  they  are 
called,  are  employed  for  this  purpose  only.  The  local  agents 
are  equipped  by  the  company  with  the  various  forms,  books  of 
record,  and  other  supplies  necessary  for  the  transaction  of 
business ; also  with  blank,  unsigned  policies. 

When  a contract  is  secured,  by  an  agent,  from  some  prop- 
erty owner  a policy  is  at  once  filled  out,  executed  and  delivered 
to  him  and  as  soon  as  possible  thereafter  an  abstract  of  this 
contract,  containing  a full  description  of  the  property  and  all 
the  details  of  the  contract,  is  made  out  by  the  agent  on  a 


YALE  INSURANCE  LECTURES. 


81 


blank  provided  for  that  purpose,  called  a “Daily  Report.”  A 
sample  blank  of  this  kind  is  now  before  you.  This  report  is 
thereupon  at  once  mailed  to  the  department  office,  which  has 
jurisdiction  over  the  territory  in  which  the  agent  is  located, 
and  at  the  end  of  each  month  an  account  or  statement  of  all 
the  contracts  made  during  the  month  is  sent  by  the  agent  to 
the  same  department  office,  accompanied  or  to  be  followed  by  a 
remittance  for  the  premiums  collected. 

The  local  agent  is  compensated  by  a commission,  usually 
15  per  cent,  on  the  amount  of  premiums  secured  or  renewed 
by  him.  He  is  presumed  and  required  to  protect  the  interests 
of  the  company  or  companies  he  represents  by  carefully  select- 
ing desirable  business  and  by  following  out  their  instructions 
in  all  matters.  Companies  endeavor  to  provide  their  agents 
with  complete  instructions  as  to  their  desires  and  methods 
concerning  the  conduct  of  business,  so  that  agents  may  prop- 
erly care  for  their  interests. 

When  the  daily  reports  of  policies  issued  reach  the  office 
of  the  company  they  are  carefully  examined  and  reviewed  by 
trained  men  called  examiners.  If  the  wording  of  the  con- 
tract (the  form,  so-called)  is  found  to  be  faulty,  if  the  price 
is  deemed  to  be  too  low,  or  if  any  other  error  is  discovered, 
the  agent  is  promptly  requested  to  amend  the  contract  in  the 
necessary  particular.  If  the  property  insured  is  deemed  to 
be  an  undesirable  subject  for  insurance,  he  is  requested  to  can- 
cel or  terminate  the  contract  at  once. 

The  duties  of  the  examiner  are  extremely  important.  They 
demand  an  intimate  acquaintance  with  the  hazards  usually 
incident  to  various  kinds  of  property ; also  familiarity  with  the 
conditions  affecting  the  district  or  town  where  each  risk  is 
located.  Moreover,  in  judging  a risk,  the  character  of  the 
ownership,  the  nature  of  the  inherent  and  adjacent  or  expos- 
ing hazards  due  to  the  various  occupants  in  the  vicinity,  the 
6 


82 


YALE  INSURANCE  LECTURES. 


amount  and  quality  of  the  protection  against  fire,  the  record 
of  the  locality  as  to  fires,  the  rate,  i.  e.,  price  obtained,  and 
numerous  other  factors  must  be  considered  and  investigated 
with  considerable  thoroughness  by  him.  To  facilitate  this 
work  the  general  offices  are  equipped  with  maps  showing 
the  construction  and  size  of  every  building  in  the  business 
districts  of  all  towns  of  importance;  also  with  commercial 
reports  indicating  the  financial  standing  and  business  records 
of  all  merchants  and  manufacturers,  inspection  reports  of 
important  risks  made  by  special  agents  and  trained  experts  as 
well,  and  various  other  tables,  books  of  reference  and  of 
rules,  which  aid  the  examiner  in  passing  judgment  upon  the 
numerous  reports  which  come  before  him.  A successful  exam- 
iner, however,  must  have  a clear  head,  quick  preceptions,  cool, 
careful  judgment,  and  a very  considerable  knowledge  acquired 
by  experience.  The  examiner  has  usually  two  or  more  assist- 
ants who  help  him  in  matters  of  detail. 

The  monthly  accounts  or  statements  before  referred  to  are 
also  carefully  gone  over  by  auditors  or  bookkeepers.  When 
the  work  of  examining  and  auditing  is  done,  the  daily  reports 
and  the  accounts  pass  on  into  the  hands  of  a large  force  of 
clerks,  who  from  them  make  up  the  elaborate  records  and 
statistics  which  the  insurance  companies  are  required  to  keep, 
partly  for  their  own  guidance  and  partly  to  comply  with  the 
laws  of  the  different  States. 

In  addition  to  the  daily  reports  and  accounts,  canceled  poli- 
cies are  also  forwarded  in  large  numbers  by  agents  to  the 
general  offices;  also  notice  of  changes  in  contracts,  called 
endorsements.  Those  must  all  pass  through  the  same  intricate 
and  complicated  process  as  the  original  daily  report. 

In  another  part  of  the  office  the  losses  are  handled.  Every 
loss  is  at  once  reported  to  the  general  office  in  whose  terri- 
tory it  occurred.  It  is  then  assigned  to  the  proper  man  for 


YALE  INSURANCE  LECTURES. 


83 


settlement — usually  a special  agent.  As  soon  as  possible  he 
visits  the  scene  of  loss  and  arranges  a settlement  with  the 
property  owner.  The  completed  reports  of  these  settlements 
are  forwarded  to  the  general  office  and  are  very  carefully 
tabulated,  classified  and  compared  with  the  record  of  premiums 
received,  the  premiums  and  losses  of  each  class  being  grouped 
by  themselves  in  order  that  the  experience  of  the  company, 
that  is,  the  profit  or  loss  arising  from  transactions  with  each 
class  of  risks,  may  be  ascertained.  A large  department  office 
in  the  course  of  one  year  will  receive,  perhaps,  125,000  daily 
reports  from  its  agents,  who  will  be  located  in,  say,  2,500  cities, 
towns  and  villages.  These  daily  reports  will  carry  premiums 
averaging  about  $20  each,  or  amounting  to  $2,500,000  in  all. 
Such  a department  will  also  have  to  adjust  and  pay  from  3,000 
to  4,000  losses  each  year.  To  keep  the  elaborate  records  and 
tables  of  statistics  concerning  all  these  transactions,  to  watch 
them  throughout  the  life  of  the  contracts,  to  collect  the  moneys 
due  and  to  carefully  and  justly  pay  the  losses — all  these  tasks 
involve  an  amount  of  detailed,  arduous  and  technical  labor 
which  is  formidable  to  contemplate.  They  also  render  neces- 
sary the  services  of  well-trained  men — high  priced,  many  of 
them — and  a very  large  expenditure  for  proper  equipment  and 
maintenance.  At  the  head  of  such  a department  is  a manager, 
or  general  agent,  as  he  may  happen  to  be  called.  He  is  respon- 
sible for  the  results  obtained  in  the  territory  under  his  juris- 
diction. He  must  see  to  it  that  the  numerous  and  troublesome 
details  of  the  general  office  work  are  kept  up,  exercise  general 
supervision  over  the  examiners  and  their  work,  direct  the 
movements  of  the  traveling  special  agents  and  inspectors, 
decide  all  important  questions  arising  in  loss  settlements,  and 
last,  but  not  least,  utilize  all  these  various  factors  in  such  a 
way  that  the  company  may  secure  its  fair  proportion  of  desira- 
ble business.  A large  department  as  indicated  above  will  have 


84 


YALE  INSURANCE  LECTURES. 


on  its  rolls  from  2,000  to  3,000  agents  and  perhaps  one  hun- 
dred or  more  salaried  employees. 

At  the  head  office  of  the  company  the  president  and  other 
officers  exercise  a general  oversight  over  all  the  departments. 
Usually  monthly  tabulated  reports  of  all  transactions  are  made 
by  the  departments  to  the  head  office.  Any  profits  are  also 
remitted  to  the  head  office  for  investment.  On  the  other  hand, 
if  losses  exceed  the  receipts  of  any  department,  advances  are 
made  to  that  department. 

The  officers  are  also  charged  with  the  duty  of  deciding  upon 
the  general  policy  and  methods  of  the  company  for  the  guid- 
ance of  the  various  departments.  The  amounts  for  which 
liability  may  be  assumed  on  different  kinds  of  risks  are  also 
determined  by  them.  In  other  words,  the  plan  of  campaign 
is  laid  out  and  managed  by  the  officers  and  executed  by  the 
department  managers  through  their  special  and  local  agents. 
In  the  case  of  those  companies  which  do  not  make  use  of 
separate  departments  located  in  different  parts  of  the  coun- 
try, a large  staff  of  officers  is  customary  at  the  head  office, 
where  the  junior  officers  perform  the  duties  usually  devolving 
upon  department  managers. 

In  the  large  cities  where  values  are  great  and  congested  and 
where  consequently  the  amount  of  business  to  be  done  is  very 
large,  another  class  composed  of  the  middlemen  or  brokers, 
as  they  are  called,  has  arisen.  These  men  secure  from  prop- 
erty owners  orders  for  insurance  which  they  then  place  with 
the  local  agent  and  in  return  receive  a portion,  usually  one- 
half  or  more,  of  the  agent’s  commission.  These  brokers 
usually  take  entire  charge  of  the  insurance  affairs  of  their 
patrons,  acting  as  their  agents  in  all  matters  relative  thereto. 
In  New  York  City  so  universal  is  this  method  of  transacting 
business  that  there  are  practically  no  local  agents  who  solicit 
or  secure  business  direct  from  property  owners,  and  most  com- 


YALE  INSURANCE  LECTURES. 


85 


panies  maintain  their  own  offices  with  salaried  managers,  with 
whom  the  brokers  deal.  The  multifarious  labors  briefly  indi- 
cated in  the  foregoing  pages  are  continued  without  cessation 
throughout  the  year  and,  at  its  close,  the  multitudinous  details 
are  aggregated  and  the  results  of  the  year’s  transactions  made 
up  in  the  different  department  offices  and  forwarded  to  the 
head  office  of  the  company.  There  all  these  figures  are  com- 
bined into  an  exhibit  called  the  annual  statement,  which  also 
includes  a detailed  list  of  the  assets  and  liabilities  of  the  com- 
pany and  other  particulars  affecting  its  business  and  its  finan- 
cial condition. 

Broadly  speaking,  these  annual  statements  show  two  general 
items  of  income  and  two  of  outgo.  The  income  obviously 
arises  from  premiums  and  the  interest  on  investments.  The 
two  avenues  of  outgo  are  for  losses  and  for  expenses. 

The  loss  ratio,  that  is,  the  percentage  of  the  annual  premiums 
which  is  required  to  pay  losses,  is,  of  course,  beyond  the  con- 
trol of  companies,  except  in  so  far  as  it  depends  upon  care  in 
selecting  and  rejecting  business  and  the  wise  distribution  of 
liabilities.  In  well-managed  companies  this  percentage  ranges 
from  45  per  cent,  to  65  per  cent,  according  to  the  experience 
of  the  year.  It  will  almost  never  happen  that  a loss  ratio  of 
but  45  per  cent,  is  obtained.  Such  a ratio  indicates  an  abnor- 
mal profit.  Companies  frequently,  however,  experience  a loss 
ratio  of  65  per  cent,  or  even  more,  but  that  figure  is  close 
to  the  danger  line  and  when  reached  usually  means  a net  loss 
on  the  year’s  business. 

The  expense  ratio  for  most  companies  will  average  about 
35  per  cent.  This  is  partly  controllable,  though  the  constantly 
increasing  interference  of  State  governments  and  the  steadily 
growing  burden  of  taxation  makes  the  task  of  limiting 
expenses  a formidable  one.  The  expense  ratio  of  35  per  cent, 
may  be  divided,  roughly,  into  the  following  items,  according 
to  the  careful  tabulations  of  Mr.  F.  C.  Moore: 


86 


YALE  INSURANCE  LECTURES. 


Commissions  to  agents 15  percent. 

For  the  salaries  and  expenses  of  traveling  special 

agents,  adjusters,  and  expert  inspectors 4^2  per  cent. 

For  taxes  2^/2  per  cent. 


For  maintenance  of  the  department  and  head 
offices,  including  the  salaries  of  all  officers, 
examiners,  clerks,  etc. ; also  for  rent,  ad- 
vertising, printing,  supplies,  etc 13  per  cent. 

Statements  of  a somewhat  similar  description  are  made  up 
by  all  properly  managed  business  enterprises  and  corporations 
for  the  information  of  their  officers  and  stockholders  and  in 
order  that  the  gain  or  loss  resulting  from  the  year’s  operations 
may  be  known. 

Fire  insurance  companies  have  an  additional  reason  for  mak- 
ing up  these  statements,  i.  e.,  the  legal  requirement  that  they 
shall  do  so.  As  early  as  1807  insurance  companies  were  re- 
quired by  the  State  of  Massachusetts  to  render  an  account  of 
their  affairs  to  the  General  Court,  but  probably  the  accounts 
so  rendered  were  more  or  less  informal.  In  1837,  however, 
they  were  compelled  to  make  annual  returns  to  the  Secretary 
of  the  Commonwealth,  by  whom  a true  abstract  of  the  returns 
was  made  to  the  legislature.  In  1855  a regular  insurance 
department  was  established. 

In  New  York,  insurance  companies  and  other  moneyed  cor- 
porations were  in  1828  required  to  render  annual  statements 
to  the  State  Comptroller.  This  law,  however,  applied  only  to 
New  York  State  corporations  which  should  thereafter  be 
created. 

In  1849  the  first  general  insurance  law  was  passed  in  New 
York,  and  by  it  all  State  companies  (except  those  with 
special  charters)  and  also  those  of  other  States  were  required 
to  render  annual  reports  of  their  condition  and  of  the  year’s 


YALE  INSURANCE  LECTURES. 


8? 


transactions ; but  not  until  1864  were  all  companies,  whether 
of  New  York  State,  other  States,  or  foreign  countries,  com- 
pelled to  render  regular  annual  statements. 

Taxation  began,  however,  as  early  as  1837,  when  a levy  of 
2 per  cent,  was  imposed  on  the  premiums  of  fire  and  marine 
insurance  companies  of  other  States.  It  was,  no  doubt,  be- 
cause the  business  of  insurance  was  novel  and  little  under- 
stood, and  furthermore  one  which  was,  in  the  early  days  of  its 
history,  a favorite  field  for  swindlers,  that  it  thus  early  came 
under  the  special  supervision  of  State  authorities.  An  addi- 
tional reason  is  to  be  found  in  the  fact  that  life  insurance  com- 
panies are  trustees  for  large  amounts,  representing  the  savings 
of  their  policy-holders. 

Finally,  the  availability  of  the  companies  as  sources  of 
revenue  was  an  early  discovery  of  the  legislatures,  and,  there- 
fore, the  annual  statements  have  always  found  their  chief  use 
as  bases  for  tax  levies,  though  by  means  of  numerous  and  con- 
stantly more  numerous  inquiries  and  queries  they  are  also 
made  to  serve  as  tests  of  solvency  and  hence  as  a means  of 
protection  to  the  insuring  public.  Companies  who  fail  to  meet 
certain  established  tests  of  strength  are  refused  authority  to 
transact  business. 

Whatever  the  reasons  may  have  been  that  first  led  the 
authorities  and  legislatures  of  States  to  thus  assume  a special 
supervision  over  the  insurance  business  far  beyond  that  to 
which  any  other  business  is  subjected,  the  custom  is  evidently  a 
permanent  one,  for,  at  the  present  time,  all  States  of  the  Union 
have  more  or  less  stringent  laws  governing  the  organization 
of  local  companies  and  the  admission  of  non-State  companies 
for  the  transaction  of  business  within  their  borders,  and  all 
without  exception  require  the  filing  of  annual  statements. 

The  tax  on  the  income  of  insurance  companies  is  an  ab- 
surdity, for  it  is  the  tax  on  a tax.  The  insurance  company 


88 


YALE  INSURANCE  LECTURES. 


must  pay  its  losses  and  expenses  from  its  premium  income. 
It  is  therefore  perfectly  evident  that  a tax  on  this  income 
must  infallibly  result  in  an  increase  of  rates.  In  no  other  way 
can  the  demand  be  met.  According  to  the  present  system,  the 
income  of  companies  is  taxed  even  when  exceeded  by  the 
outgo  for  losses  and  expenses.  The  years  1889,  1891,  1892, 
1893  and  1898  were  all  unprofitable  years.  The  aggregate 
losses  of  companies  reporting  to  the  New  York  department 
were,  during  those  years,  over  $33,000,000.  Yet  in  those  same 
years,  according  to  Mr.  Moore,  the  companies  paid  taxes 
amounting  to  $14,500,000.  The  net  profit  for  all  companies 
for  the  entire  period  from  1891  to  1902,  disregarding  the  in- 
crease of  outstanding  liabilities,  was  $59,571,933-  The  taxes 
paid  during  the  same  period  amounted  to  $40,628,927.  The 
premiums,  roughly  speaking,  were  $1,500,000,000;  therefore, 
the  taxes  collected  during  these  years  were  equal  to  2 7%oo  per 
cent,  of  the  entire  amount  of  premiums  collected,  and  68  2/ie 
per  cent,  of  the  entire  profit  resulting  from  their  insurance 
transactions.  It  is  doubtful  if  any  other  business  in  the  world’s 
history  was  ever  so  severely  taxed,  or  any  other  institution  in 
so  many  ways  hampered,  harassed  and  annoyed  by  the  opera- 
tion of  State  laws  and  State  officials  as  are  the  insurance 
companies.  In  speaking  of  this  matter  Mr.  Charlton  T.  Lewis 
said : “Government  supervision,  wasteful  taxation  and  the 
ignorant  prejudices  which  support  these  practices  are  the  worst 
evils  of  the  insurance  world.”  The  only  hope  is  that  a more 
widespread  knowledge  and  appreciation  of  the  real  nature  of 
insurance  and  of  its  true  principles  may  serve  to  allay  these 
prejudices  and  secure  some  modification  of  the  present  system 
and  methods  of  State  supervision  and  control. 

The  largest  organization  of  companies  known  to  the  insur- 
ance world  is  called  “The  National  Board  of  Underwriters,” 
with  headquarters  in  New  York  City.  This  association  is  com- 


YALE  INSURANCE  LECTURES. 


89 


posed  of  companies  and  comprises  practically  all  companies 
doing  a general  business  throughout  the  United  States.  It 
is  advisory  only,  in  capacity,  and  concerns  itself  with  proper 
forms  of  contracts,  the  investigation  of  new  hazards  (such,  for 
instance,  as  that  arising  from  the  use  of  acetylene  gas)  and 
with  other  problems  of  general  interest.  It  endeavors  to  check 
the  practice  of  incendiarism  and  arson,  tries  to  secure  the 
passage  of  proper  laws  and  to  defeat  the  great  number  of 
improper  ones  which  are  annually  attempted  to  be  passed. 
In  a very  general  way  it  strives  to  raise  the  standard  of  the 
business  and  to  promote  intelligent  and  scientific  underwriting. 
Each  year  elaborate  tables  showing  the  results  of  the  opera- 
tions of  all  companies  are  made  up  by  this  board.  These 
tables  are  extremely  valuable.  Having  nothing  to  do  with 
prices  and  exercising  no  authority  over  its  members,  it  is  an 
organization  which  does  not  come  in  conflict  with  the  law  of 
any  State. 

In  the  several  parts  of  the  country — East,  South  and  West, 
and  on  the  Pacific  Coast — are  organizations  of  company  officers 
or  district  managers  embracing  usually  from  50  to  75  per 
cent,  of  the  companies  operating  in  the  respective  fields, 
which  not  only  apply  the  suggestions  of  the  National  Board 
in  a more  or  less  authoritative  and  mandatory  way  to  the 
business  methods  of  their  particular  districts,  but  also  devise, 
where  the  law  permits,  schedules  and  methods  for  making 
rates  and  prices  for  the  various  classes  of  property.  These 
organizations  also  prepare  forms  of  contracts,  rules  and  re- 
quirements in  accordance  with  which  the  different  classes  of 
business,  especially  those  peculiar  to  the  district, — such  as 
cotton  in  the  South,  grain  in  the  West,  etc., — may  be  wisely 
handled. 

In  the  various  States  of  two  of  these  larger  districts,  except 
where  prohibited  by  law,  there  are  minor  organizations  com- 


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YALE  INSURANCE  LECTURES. 


posed  of  the  traveling  men  or  special  agents  of  many  or 
most  of  the  companies.  These  associations  are,  to  a more  or 
less  extent,  under  the  control  of  the  larger  organizations  and 
carry  on  the  same  kind  of  work,  but  in  a more  direct  and 
minute  way  applying  the  rating  schedules  to  individual  towns 
and  properties.  There  are  still  smaller  associations  composed 
of  the  local  agents  of  the  several  cities,  towns  and  villages. 
These  local  organizations  are  usually  called  local  boards,  and 
supervise  the  conduct  of  business  in  their  respective  localities. 

Of  late  another  and  entirely  different  kind  of  organization 
has  appeared  (in  the  insurance  world),  namely,  “The  National 
Association  of  Local  Agents,”  with  branches  in  every  State. 
This  body  has  for  its  purpose  the  advancement  of  the  interests 
of  local  agents  everywhere,  their  protection  from  injury  arising 
from  the  actions  of  insurance  companies,  city  or  state  legis- 
latures, and  from  any  kind  of  competition  which  they  con- 
sider unfair  or  likely  to  destroy  the  agency  system.  It  will  be 
readily  seen  that  all  these  organizations  constitute  an  extremely 
complex  system. 

The  connection  between  the  various  portions  of  it  is  not  to 
be  called  close,  and  their  methods  and  general  policies  are 
frequently  inharmonious  and  irreconcilable.  Local  jealousies, 
the  great  number  of  companies  engaged  in  fierce  competition, 
the  spirit  of  home-rule  (nowhere  so  evident  as  in  the  insurance 
world),  and  all  of  these  conditions  intensified  by  the  facility 
with  which  local  stock  and  mutual  companies  may  be  organized 
and  operated,  prevent  anything  like  a complete  or  dominant 
combination  among  companies  or  their  representatives.  In 
fact,  it  is  probably  true  that  no  other  business  of  such  wide- 
spread character  is  carried  on  under  such  continuously  aggres- 
sive competition. 

It  is  true  that  in  certain  sections  and  in  certain  cities  and 
towns  uniform  conditions  as  to  rates  and  methods  obtain,  and 


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91 


in  times  of  widespread  disaster,  or  after  great  conflagrations, 
the  companies  do  for  a time  successfully  repress  their  com- 
petitive warfare;  but  at  the  first  dawn  of  prosperity  the  strife 
begins  afresh  and  continues  until  disaster  again  destroys  the 
foolish  and  brings  temporary  wisdom  to  the  survivors.  Until 
these  conditions  which  surround  the  business  are  radically 
changed  there  need  be  no  fear  of  an  insurance  trust. 


Rates  and  Hazards 


BY  RICHARD  M.  BISSELL 

In  the  language  of  fire  insurance,  the  name  “risk”  is  applied 
to  any  piece  or  kind  of  property  which  an  insurance  policy 
may  cover.  The  hazards  of  a certain  risk  (as  for  instance  a 
building),  or  of  a certain  class  of  risks  (such  as  flour  mills), 
are  the  peculiar  or  particular  circumstances  or  characteristics 
pertaining  to  or  affecting  it  which  favor  or  make  for  its 
destruction  by  fire.  The  extent  to  which  these  hazards 
endanger  a given  risk  theoretically  governs  its  rate,  i.  e.,  the 
price,  per  cent.,  which  must  be  paid  for  insurance.  A brief 
examination  of  the  subject  of  hazards,  therefore,  will  naturally 
precede  and  lead  up  to  the  subject  of  rates. 

Hazards  may  be  divided  broadly  into  two  classes, — physical 
and  moral,  or  personal,  as  they  are  sometimes  called.  The 
physical  hazards  are  inherent  in  the  risk  itself  and  in  its 
surroundings.  Moral  hazards  arise  from  personal  factors. 
Physical  hazards  may  be  partially  measured,  appraised,  esti- 
mated, and  to  a certain  extent  controlled.  Moral  hazards  are 
hidden,  presumed  rather  than  known,  not  to  be  measured  or 
scheduled. 

The  causes  of  fires  are  of  far  greater  variety  than  is  com- 
monly known.  They  are  indeed  almost  infinite  in  number, 
for  practically  every  substance  and  almost  every  process  of 
labor,  manufacture  or  commerce  is  under  certain  circumstances 
or  in  certain  relations  to  other  articles  or  processes  productive 
of  danger  from  fire. 

Physical  hazards  may  be  divided  into  two  classes,  as  external 
and  internal,  which  are  sufficiently  distinguished  by  their 


YALE  INSURANCE  LECTURES. 


93 


names.  The  external  hazards  include  lightning,  conflagra- 
tions, sparks,  bonfires,  forest  and  prairie  fires  (which  are 
sometimes  very  serious  hazards),  and  exposure,  the  greatest 
of  which  by  far  is  exposure, — i.  e.,  the  danger  to  which  a 
risk  is  subject  from  the  burning  of  other  risks  or  substances. 
To  this  cause  is  due  28  per  cent,  of  all  losses,  both  as  to 
number  and  value.  Property  valued  at  $50,000,000  was 
destroyed  by  exposure  fires  in  1902.  We  speak  of  exposure  as 
a hazard  and  attribute  28  per  cent,  of  all  losses  to  exposure, 
meaning  thereby  that  as  to  28  per  cent,  of  all  risks  that  are 
destroyed  or  damaged,  the  losses  are  caused  by  fires,  the 
origin  of  which  is  exterior  to  the  risks  embraced  in  the  28 
per  cent.  It  is  an  obvious  truth,  however,  that  the  original 
cause  of  an  exposure  loss  is  usually  to  be  found  in  some 
physical  hazard  and,  ordinarily,  an  internal  physical  hazard  per- 
taining to  an  adjacent  risk.  The  following  general  rule  may 
be  laid  down:  The  degree  of  exposure  hazard  to  which  any 
risk  is  subject  is  determined,  first,  by  its  own  combustibility 
and  ignitibility,  i.  e.,  the  readiness  with  which  it  will  ignite 
and  the  rapidity  and  completeness  with  which  it  may  be 
destroyed  by  fire;  second,  by  the  distance  which  separates  it 
from  the  buildings  or  substances  from  which  the  exposure 
hazards  arise;  third,  by  the  inherent  hazards  of  the  risks 
adjacent  to  it  or  within  burning  distance,  and  fourth,  by  the 
extent  of  protection  which  it  receives  from  water  works,  fire 
department,  or  private  apparatus.  Under  especially  dangerous 
conditions  there  is  hardly  any  limit  to  the  burning  distance. 
In  the  summer  of  1894,  during  a drought  accompanied  by  high 
winds,  there  were  extensive  forest  fires  in  northern  Wisconsin 
and  Michigan  and  risks  were  burned  by  exposure  arising  from 
fires  twenty  miles  or  more  distant.  Sparks  and  embers  fell  on 
the  decks  of  vessels  many  miles  from  land  on  Lake  Superior. 
The  exposure  hazard  constitutes  a factor  in  the  total  of  a 


94 


YALE  INSURANCE  LECTURES. 


risk’s  hazards,  which  is  highly  susceptible  to  reduction  by 
efficient  fire  protection.  In  case  of  frame  mercantile  buildings, 
it  frequently  constitutes  the  most  important  factor  in  determin- 
ing the  rate. 

The  most  important  of  the  external  hazards  are,  in  their 
order, — after  exposure,  sparks,  which  cause  about  4 per  cent, 
of  the  entire  number  of  fires  (locomotive  sparks  alone  caused 
over  six  hundred  out  of  fifteen  hundred  cotton  fires  during 
1902,  of  which  the  average  loss  amounted  to  over  $5,000), 
and  lightning,  which  is  responsible  for  nearly  3 per  cent,  of 
all  losses,  or  three  and  a half  millions  in  1902. 

The  internal  hazards  are  much  more  numerous  and,  leaving 
out  exposure,  much  more  productive  of  fires.  They  may  be 
sub-divided  into  five  classes,  which,  however,  are  not  abso- 
lutely distinct.  The  first  class,  according  to  our  arbitrary 
division,  is  spontaneous  combustion.  This,  while  ordinarily 
not  an  imminent  hazard,  becomes  one  whenever  vegetable  or 
animal  fibre  is  handled  or  stored,  as  in  cotton  and  woolen 
mills,  cotton  warehouses,  ice  houses,  etc.  It  is  a characteristic 
of  these  substances  when  more  or  less  saturated  with  any  oily 
substance  (more  especially  if  it  be  an  animal  oil  or  grease), 
that  rapid  oxidation  or  spontaneous  combustion  ensues.  Two 
hundred  and  three  out  of  1,683  fires  in  cotton  mills,  and  151 
out  of  1,630  fires  in  woolen  mills  were  due  to  this  cause. 

The  next  general  division  comprises  the  hazards  due  to  the 
operation  of  machinery.  These  include  friction  of  machinery, 
heated  bearings,  accidents  and  breakages,  over-heated  boilers 
and  stacks  adjacent  to  inflammable  substances,  and  the  presence 
of  foreign  substances  in  fast-running  machinery.  For  example, 
in  the  pickers  used  in  cotton  and  woolen  mills  and  in  cotton 
ginning  machines,  sparks  caused  by  the  presence  of  stones, 
buttons,  cartridges,  etc.,  cause  a great  many  fires.  In  cotton 
mills,  984  out  of  1,683  fires  were  caused  by  friction  and  the 


YALE  INSURANCE  LECTURES. 


95 


presence  of  foreign  substances  in  machinery,  and  in  flour  mills, 
477  out  of  2,616  fires  were  caused  by  friction  in  machinery. 

The  third  division  comprises  the  hazards  incident  to  pro- 
cesses. Among  these  are  hazards  arising  from  dry  kilns, 
roasting  furnaces  or  ovens,  use  of  inflammable  mixtures  for 
painting  or  japanning,  the  compounding  of  combustible  and 
explosive  chemicals  in  drug  and  paint  mills,  the  improper  or 
careless  handling  of  heated  substances,  such  as  molten  metals 
or  the  dried  fertilizer  just  from  the  dry  kilns,  the  use  of  fire 
heat  under  kettles,  etc.,  and  the  production  of  various  explo- 
sive gases  or  mixtures,  as,  for  instance,  dust  in  flour  mills 
and  starch  factories  or  benzine  vapor  in  furniture  factories  or 
japanning  ovens. 

The  fourth,  and  so  far  as  the  number  of  losses  and  value 
of  property  are  concerned,  by  far  the  most  important  of 
internal  physical  hazards,  is  due  to  the  various  processes  and 
kinds  of  apparatus  used  for  purposes  of  heating  and  light- 
ing. It  is  quite  natural  that  the  process  of  heating — which 
usually  means  the  actual  use  of  fire — should  make  more  losses 
than  any  other  cause ; yet  it  is  a sad  commentary  on  American 
methods  of  building  and  on  American  laws  concerning  build- 
ing, that  defective  flues  should  be  responsible  for  twice  as 
many  fires  as  any  other  one  physical  or  known  moral  hazard. 
This  cause  also  is  responsible  for  a greater  property  loss  than 
any  other.  Flues  may  be  defective  in  construction,  as  when 
wooden  joists  or  timbers  are  allowed  to  pierce  their  walls, 
or  when  unprotected  holes  are  left  by  careless  masons  through 
which  sparks  or  flames  may  escape.  They  may  become  defec- 
tive by  settling  or  cracking,  due  to  insufficient  support,  or 
because  the  building  is  moved  or  shaken  in  consequence  of  a 
tornado  or  wind  storm  or  if  struck  by  lightning.  In  1902,  over 
14,000  fires,  or  13  per  cent,  of  the  total  number  of  fires, 
were  attributed  to  defective  flues,  and  the  total  property  loss 


96 


YALE  INSURANCE  LECTURES. 


resulting  was  over  $11,000,000.  Other  fires  due  to  methods 
of  heating  were  caused  by  hot  ashes  and  coals,  improperly 
deposited  in  dangerous  places  (barrels  for  example),  or 
through  carelessness  or  defective  apparatus  allowed  to  come 
in  contact  with  combustible  substances.  Still  other  fires  were 
caused  by  hot  stove  and  furnace  pipes  and  by  over-heated 
stoves  and  furnaces,  and  the  list  includes  the  fires  caused  by 
steampipes  passing  through  or  adjoining  unprotected  wooden 
surfaces.  In  all,  about  20  per  cent,  of  the  total  number  of 
fires  are  directly  traceable  to  the  use  of  fire  for  heating 
purposes. 

The  fires  due  to  methods  of  illumination  included  in  1902 
over  400  caused  by  candles,  over  3,700  from  accidents  to  lamps, 
resulting  in  more  than  $2,000,000  of  losses,  970  from  gas  jets 
and  over  1,000  from  electric  wires,  which  are  classed  with 
the  methods  of  illumination  for  convenience,  though  electric 
wires  are  often  used  to  convey  power.  The  losses  due  to  the 
use  of  electricity  are  larger  by  far  in  amount  than  those  due 
to  any  of  the  other  means  of  illuminating,  chiefly,  no  doubt, 
because  electricity  is  now  so  generally  used  in  buildings  and 
localities  where  large  values  are  collected,  while  candles,  lamps 
and  even  gas  are  now  principally  used  in  dwellings,  small 
stores  and  small  factories;  furthermore,  fires  of  electrical 
origin  are  often  not  discovered  until  they  have  gained  con- 
siderable headway.  The  value  of  property  destroyed  by  fires 
of  electrical  origin  in  1902  was  $12,000,000.  Fires  due  to 
other  methods  of  illumination  were  more  than  four  times  as 
numerous  as  the  fires  of  electrical  origin,  yet  the  ensuing 
loss  was  slightly  below  $5,000,000  or  less  than  one-half  the 
amount  due  to  use  of  electricity. 

The  fifth  general  division  of  internal  hazards  includes  every- 
thing not  already  classified.  The  various  fires  due  to  accidents 
and  carelessness  find  a place  here.  The  list  includes  oil  stove 


YALE  INSURANCE  LECTURES. 


97 


accidents,  fires  from  matches,  which  caused  in  1902  four  thou- 
sand fires,  with  a loss  of  over  one  and  half  million  of  dollars, 
children  playing  with  fire,  cigars,  cigarettes  and  tobacco  pipes, 
with  a record  of  1,100  fires  in  1902,  and  the  numerous  other 
causes  of  comparatively  smaller  importance  which  have  not 
already  found  mention. 

All  of  these  classes  and  sub-classes  of  hazards  might  still 
be  almost  indefinitely  re-subdivided,  for  new  hazards  and  new 
manifestations  of  old  hazards  are  to  be  met  with  daily.  If 
the  causes  of  the  76,000  fires  which  occurred  in  1902  could  be 
ascertained  with  accuracy,  each  would  be  found  to  differ  in 
some  respects  from  every  other.  When  all  ascertainable 
hazards  have  been  classified  and  the  causes  for  fire  set  forth 
so  far  as  we  can  ascertain  them,  there  yet  remains  about  16 
per  cent,  of  all  fires  for  which  the  causes  cannot  be  discovered. 
It  is  not  strange  that  the  causes  of  many  fires  escape  detection. 
In  the  first  place  many  incendiary  fires,  if  fully  successful, 
destroy  all  traces  of  origin.  The  same  is  true  of  fires  caused 
by  electric  wires,  defective  flues,  spontaneous  combustion, 
sparks,  and  many  other  obscure  or  hidden  causes.  In  fact, 
whenever  fires  acquire  such  proportions  before  their  discovery 
as  to  prevent  subsequent  inspection  of  the  points  of  origin, 
or  when  the  amount  of  destruction  is  sufficient  to  obliterate 
any  indication  of  the  cause  (in  cases  when  the  origin  is  not 
witnessed)  that  cause  will  usually  remain  a mystery.  It  will 
be  readily  seen  that  this  very  considerable  percentage  of  fires 
of  unknown  origin  renders  anything  like  an  exact  estimate  of 
the  effect  of  the  various  hazards  impossible,  and  one  of  the 
difficulties  of  making  a scientific  and  accurate  apportionment 
of  rates  is  therefore  at  once  obvious. 

The  foregoing  must  be  considered  to  be  merely  a rough 
general  index  of  the  numerous  heads  included  in  the  very 
important  subject  of  physical  hazards.  As  the  profession  of 
7 


98 


YALE  INSURANCE  LECTURES. 


fire  underwriting  progresses  and  develops,  the  investigation 
and  safeguarding  of  these  hazards  is  more  and  more  passing 
into  the  hands  of  experts,  and,  indeed,  the  subject  is  one 
sufficiently  comprehensive  and  complex  to  afford  a life  work 
to  students  of  the  best  technical  training. 

In  this  discussion  we  must  now  pass  on  to  the  considera- 
tion of  the  other  grand  division  of  hazards,  usually  called 
moral  hazards.  Moral  hazards  arise  from  the  personal 
(including  the  financial)  circumstances  which  affect  risks. 
They  are  indefinite,  incapable  of  analysis,  separation  or  estima- 
tion, yet  they  are  of  the  greatest  importance  in  fire  insurance. 
Some  authorities  believe  that  more  fires  are  attributable, 
directly  or  indirectly,  to  moral  or  personal  causes  than  to 
physical,  and,  while  any  such  attempt  to  estimate  the  results 
of  moral  hazards  must  be  largely  conjectural,  it  is  quite  certain 
that  they  are  accountable  for  a very  large  percentage  of  the 
fire  waste.  Moral  hazard  is  said  to  exist  in  regard  to  a par- 
ticular risk  whenever  a benefit,  real  or  supposed,  direct  or 
indirect,  would  ensue  to  any  one,  especially  the  owner,  by 
reason  of  the  destruction  of  the  insured  property;  also,  and 
nearly  as  important,  whenever  for  any  reason  no  one  has  a 
strong  interest  in  its  preservation. 

In  other  words,  not  only  the  desire  to  destroy,  but  also 
the  lack  of  a strong  desire  to  preserve,  creates  moral  hazard, 
so  called,  and  it  is  hard  to  say  which  condition  is  the  more 
dangerous.  The  prospect  of  a profit  from  fire  or  the  absence 
of  a financial  incentive  to  preserve  a risk  make  it  impossible 
for  an  insurance  company  to  rely  upon  the  exercise  of  that 
due  care  and  diligence  for  its  protection  which  is  essential  if 
business  is  to  be  transacted  at  a profit. 

There  are  various  ways  in  which  moral  hazards  may  arise 
which  can  be  named  and  described.  The  possibility  of  their 
occurrence  is  patent  to  every  one  as  soon  as  they  are  named, 


YALE  INSURANCE  LECTURES. 


99 


but  to  find  out  or  know  in  advance  that  any  of  them  exist  in 
connection  with  a given  risk  is  often  beyond  our  powers. 
Hence  losses  due  to  such  causes  cannot  be  avoided.  Any 
cause  which  seriously  injures  the  value  of  a risk  or  diminishes 
its  productivity  is  likely  to  create  moral  hazard,  if  the  risk 
be  well  covered  by  insurance.  Therefore  insurance  companies 
avoid  risks  where  for  any  reason  there  is  doubt  as  to  value 
or  productivity, — summer  hotels  which  have  not  succeeded, 
buildings  which  are  likely  to  be  condemned,  mines  where  paying 
quantities  of  ore  nave  not  been  found,  flour  mills  where  the 
water  power  has  failed,  etc.,  etc.  All  of  these  are  pertinent 
examples.  Any  man  would  prefer  money  equal  to  the  cost  of 
such  properties  to  the  properties  themselves.  So,  too,  experi- 
mental properties, — temporary  branch  stores  and  new  ventures 
of  every  description  which  have  not  demonstrated  their  earn- 
ing power,  must  be  handled  with  greatest  caution.  The  mere 
fact  that  capital  has  been  invested  does  not  always  indicate 
that  value  exists,  and  the  rule  of  prudence  and  of  indemnity 
as  well,  viz.,  “no  profit  to  the  assured  from  fire,”  points 
the  way  to  the  wise  rejection  of  risks  where  this  question 
of  value  is  involved.  Such  risks  are  not  only  likely  to  be 
wilfully  fired  by  a dishonest  insured  owner,  but,  even  in  the 
hands  of  honest  men,  are  not  likely  to  receive  that  assiduous 
care  and  watchfulness  which  men  give  to  their  successful 
enterprises.  Indifference  and  carelessness  differ  only  in  degree 
from  the  actual  desire  for  the  destruction  of  property  so  far 
as  the  probability  of  its  accomplishment  is  concerned. 

In  view  of  the  considerations  mentioned  above,  insurance 
companies  look  with  disfavor  upon  those  risks  where  the 
amount  of  insurance  carried  exceeds  the  value  of  the  property 
and  are  inclined  to  fear  a moral  hazard  in  connection  with 
them.  It  goes  without  saying  that  such  a condition  would  be 
dangerous  where  the  owner  is  dishonest,  and  where  he  is 


IOO 


YALE  INSURANCE  LECTURES. 


honest  the  fact  that  no  personal  loss  can  come  to  him  from 
a fire  is  likely  to  induce  that  carelessness  and  lack  of  pre- 
caution which  constitute  one  species  of  moral  hazard. 

Financial  embarrassment  and  the  pressing  necessity  for 
ready  cash  often  create  the  most  serious  kind  of  moral  hazard. 
A merchant  with  notes  overdue  or  who  sees  failure  ahead, 
or  a farmer  who  cannot  pay  interest  on  his  mortgage,  is 
often  in  a position  where  the  ready  money  obtainable  from 
his  insurance  policies,  even  if  not  equal  to  the  value  of  his 
property,  would  nevertheless  help  him  tide  over  a pressing 
emergency. 

Another  situation  which  frequently  involves  moral  hazard 
is  when  property  of  any  kind  becomes  involved  in  litigation  or 
where  there  is  dispute  as  to  ownership.  In  such  cases  divisible 
cash  is  much  more  available  than  property  which  must  be 
liquidated,  and  everybody  interested  might  well  be  benefited  by 
a fire  which  would  simplify  the  settlement  of  a dispute.  More- 
over, the  enmities  aroused  in  the  course  of  litigation  are  them- 
selves a source  of  danger. 

The  foregoing  remarks  apply  to  moral  hazards  which  arise 
in  connection  with  the  owners  of  property,  but  there . are 
species  of  moral  hazard  which  do  not  involve  acts  or  neglect 
of  the  owner,  but  spring  from  the  acts  or  desires  of  others. 
These  chiefly  arise  from  the  ill-will  of  those  to  whom  the 
property  owner  or  his  property  is  in  some  way  objectionable, 
or  who  have  been  or  are  likely  to  be  injured  by  the  nature 
of  the  property  itself  or  the  kind  of  work  carried  on  therein. 
Any  building,  such  as  a fertilizer  factory,  contagious  hospital, 
dance  hall  or  saloon,  which  interferes  with  the  peace  and 
enjoyment  of  a neighborhood  or  hurts  the  value  of  surround- 
ing property,  offers  a constant  temptation  to  those  who  may 
be  injured  by  it.  Its  destruction  would  be  a distinct  benefit 
to  them.  Similarly,  any  property  owner  whose  disposition  and 


YALE  INSURANCE  LECTURES. 


IOI 


practices  are  such  as  to  make  numerous  and  bitter  enemies  is 
likely  to  feel  the  results  of  the  hostility  thus  aroused  through 
the  burning  of  his  property. 

It  will  be  seen  from  the  preceding  pages  that  the  elements 
which  go  to  make  up  hazards  to  which  insured  property  is 
subject  are  numerous,  complicated  and  varied.  We  will  now 
endeavor,  briefly,  to  survey  the  methods  used  by  insurance 
companies  to  measure  these  hazards,  i.  e.,  to  fix  rates  or  prices. 

Moral  hazards  may  be  dismissed  at  the  outset;  they  cannot 
be  measured  or  charged,  for  usually  they  cannot  be  ascertained 
till  after  a fire.  Their  existence,  however,  greatly  increases 
the  fire  waste  and  is  responsible  for  the  greater  part  of  what 
are  known  as  basis  rates,  to  be  later  described,  i.  e.,  the  irre- 
ducible foundation,  incapable  of  analysis,  upon  which  all 
systems  and  every  schedule  of  rates  are  based. 

In  the  early  part  of  this  course  the  principle  was  laid  down 
that  fire  insurance  is  a tax, — a tax  levied  for  a specific  pur- 
pose,— to  repair  the  fire  waste.  All  agree  that  taxes  are  neces- 
sary evils,  but  there  is  anything  but  unanimity  as  to  methods 
for  imposing  and  collecting  them.  No  other  function  of  gov- 
ernment causes  such  bitter  debate,  acrimonious  dispute,  public 
clamor  and  individual  discontent  as  this  matter  of  taxes. 
There  is  perhaps  no  other  obligation  resting  upon  citizens 
that  is  so  constantly  and  ingeniously  evaded. 

Now  it  is  by  means  of  a graduated  scale  of  rates  or  charges 
that  insurance  companies  collect  the  enormous  sums  required 
to  recoup  the  provident  among  the  losers  by  fire,  and  there  is 
the  same  diversity  of  opinion,  almost  the  same  intensity  of 
debate,  among  those  who  devise  these  rates  as  exists  between 
protectionists,  free-traders  and  single  tax  theorists.  Moreover, 
from  the  public  which  is  taxed  arise  the  same  clamors  of 
discontent,  the  same  charges  of  inconsistency,  the  same 
endeavors  to  lessen  the  individual  burden  which  are  to  be 


102 


YALE  INSURANCE  LECTURES. 


noted  in  the  process  of  collecting  ordinary  taxes,  and  too  often, 
as  in  the  case  of  such  taxes,  these  complaints  have  some 
reasonable  foundation.  Also,  as  in  the  case  of  ordinary  taxes, 
it  frequently  happens  that  the  most  clamorous  objectors  and 
the  most  enterprising  in  securing  relief  are  to  be  found  among 
that  number,  who,  if  the  truth  were  known,  are  taxed  at  too 
low  a rate  rather  than  too  high.  From  the  very  nature  of 
things  these  clamors  and  this  discontent  are  inevitable,  though 
as  the  process  of  making  rates  becomes  more  and  more  scien- 
tific and  therefore  equitable,  we  may  hope  that  both  the  dis- 
content and  the  reason  for  it  may  be  greatly  lessened.  That 
there  is  some  ground  for  the  discontent,  all  underwriters  will 
agree,  for  the  task  of  apportioning  with  absolute  correctness 
and  fairness  the  fire  loss  among  the  various  classes  of  risks 
and  to  each  individual  of  a class,  according  to  the  hazard  of 
each,  is  an  absolutely  impossible  one.  To  even  approximate 
fairness  is  enormously  difficult.  This  is  partly  because  of  the 
absence  of  reliable  data  and  the  impossibility  of  obtaining 
them.  There  are,  broadly  speaking,  no  constant  factors  in  the 
rating  problem.  In  life  insurance,  rates  to-day  are  frequently 
based  upon  a mortality  table  constructed  from  the  experience 
of  seventeen  companies  in  1838,  and  these  tables  are  still 
found  to  be  substantially  reliable,  but  there  are  no  unchang- 
ing mortality  tables  in  fire  insurance  experience. 

The  proper  basis  for  a table  of  rates,  constructed  on  scien- 
tific principles,  might  well  be  thought  to  be  the  combined 
experience  of  a number  of  companies  carrying  similar  classes 
of  hazards  during  a period  sufficiently  long,  and  over  a field 
sufficiently  wide,  to  justify  generalization.  Such  data  have 
been  hitherto  unobtainable  for  various  reasons,  viz. : lack  of 
uniform  system  of  classification,  lack  of  cooperation  owing  to 
the  furiously  competitive  conditions  under  which  the  business 
is  carried  on,  and  finally  and  chiefly,  the  difficulty  of  properly 


YALE  INSURANCE  LECTURES. 


103 


classifying  those  most  numerous  losses  which  result  from  fires 
communicated  from  one  building  to  another,  known  as  expo- 
sure losses,  and  those  other  numerous  losses,  the  causes  of 
which  are  unknown.  Even  were  the  necessary  data  obtainable 
and  could  they  be  properly  segregated,  their  value  as  bases  for 
rate  tables  might  be  open  to  question.  In  the  last  analysis  the 
basis  for  the  rate  on  any  risk  must  be  largely  determined  by  the 
hazards,  i.  e.,  possible  causes  of  fire,  inherent  in  risks  of  the  class 
to  which  it  belongs.  For  example,  the  rate  on  a flour  mill  must 
be  based  upon  the  known  dangers  inherent  to  ajl  flour  mills, 
with  such  additions  or  subtractions  as  the  peculiarities  of  the 
individual  mill  may  make  proper;  but  during  the  last  forty 
years  the  process  of  milling  flour  has  been  revolutionized; 
instead  of  the  old  heavy  millstones  revolving  slowly,  we  now 
have  small  steel  rollers  operated  at  a very  high  speed. 
Formerly,  owing  to  the  imperfect  apparatus  used,  flour  mills 
were  so  filled  with  dust  that  the  air  in  them  was  very 
like  a dry  fog,  impenetrable  to  the  eye  in  many  parts  of  the 
mill.  This  dust  was  inflammable  to  the  extent  of  being 
explosive.  The  best  modern  mills  contain  machinery  which 
practically  eliminates  dust.  It  would  be  hardly  too  much  to 
say  that  all  processes,  from  the  time  the  wheat  enters  the 
mill  till  the  flour  is  packed  in  bags  or  barrels,  differ  from 
those  in  vogue  forty  years  ago.  Probably  it  would  also  be 
within  the  bounds  of  truth  to  say  that  each  year  brings  a new 
change  in  some  part  of  the  machinery  or  process.  What  is 
true  of  flour  milling  is  true  of  most  other  manufacturing  indus- 
tries. One  of  the  causes  of  the  success  of  American  manu- 
facturers has  been  their  willingness  to  discard  old  machines 
long  before  they  are  worn  out  for  new  ones  better  designed 
for  their  work,  while  foreigners  cling  to  their  old  machines, 
both  from  unwillingness  to  change  and  from  motives  of  false 
economy.  A flourishing  rubbish  heap  is  often  a sign  of  real 
progress. 


104 


YALE  INSURANCE  LECTURES. 


Again,  the  various  processes  and  machines  which  have  come 
into  existence  in  the  effort  to  make  valuable  the  waste  products 
of  various  industries,  have  entirely  altered  the  nature  of  many 
factories.  For  instance,  in  the  case  of  packing  houses, — in 
addition  to  the  work  for  which  such  buildings  were  originally 
designed,  viz. — the  slaughtering,  cutting,  curing  and  keeping 
of  beef,  pork,  ham,  sausage,  etc.,  there  have  been  added  the 
manufacture  of  fertilizer,  of  cooked  canned  meats  and  vege- 
tables, the  manufacture  of  medicinal  extracts,  and  other  pro- 
cesses too  numerous  to  mention,  each  of  which  brings  a new 
hazard  to  be  estimated  and  accounted  for  in  the  rate. 

Furthermore,  there  are  certain  changes  in  methods  of  heat- 
ing and  lighting  and  of  using  power,  involving  the  use  of 
gasoline,  electricity,  etc.,  which  have  greatly  altered  and  are 
constantly,  to  a large  extent,  altering  the  hazards  of  the 
buildings  where  they  are  used.  Every  new  machine,  every  new 
process,  makes  a change  in  the  sum  total  of  hazards  and 
therefore  the  carefully  collected  data,  showing  the  experience 
on  any  particular  class  of  risks,  may  at  any  time  by  the 
invention  of  new  machinery  or  by  the  discovery  of  a new 
process,  chemical  or  otherwise,  be  rendered  absolutely  value- 
less, and  the  underwriter  may  be  compelled  to  make  new  rates 
to  cover  hazards  which  have  not  endured  long  enough  to 
furnish  any  experience  whatsoever. 

Difficult  as  the  accumulation  of  proper  data  and  the  ascer- 
tainment of  the  fire  cost  of  each  class  might  be,  and  despite 
the  necessity  for  frequent  revision  and  reconstruction,  owing 
to  the  changing  nature  of  the  factors  involved,  insurance 
companies  might  well  undertake  the  task  and  endeavor  to 
more  closely  ascertain  the  necessary  basis  of  fire  cost  for 
each  class  of  business  as  a foundation  upon  which  to  build  a 
proper  system  of  rates,  were  it  not  for  the  hostility  of  legis- 
latures, and  of  the  people  as  well,  to  any  kind  of  combined 


YALE  INSURANCE  LECTURES.  1 05 

or  associated  endeavor  to  fix  or  maintain  such  rates.  Such 
hostility,  we  must  hold,  arises  from  a failure  to  comprehend 
the  true  nature  of  insurance  and  the  further  failure  to  appre- 
hend the  principle  that  a properly  constituted  rate  is  chiefly 
made  up  of  factors  which  are  not  in  the  control  of  under- 
writers and  which  cannot  be  correctly  ascertained  and  formu- 
lated by  them  except  through  associated  effort  and  combined 
experience.  The  attempt  to  cure  inequalities  and  injustices 
which  occur  in  the  making  of  rates  by  legal  process,  springs 
from  the  same  mental  astigmatism  which  induces  men  to  at- 
tempt by  law  to  prevent  fluctuations  in  the  purchasing  value  of 
silver  or  of  any  other  commodity.  Fair,  equitable  and  adequate 
rates  are  a prime  necessity,  not  only  for  insurance  companies, 
but  for  the  insuring  public,  for  in  the  long  run  the  premium 
income  must  pay  the  losses.  In  other  words,  ^adequate  security 
demands  adequate  rates.  Impairment  of  security,  an  undoubted 
loss  to  policy-holders,  must  result  from  inadequate  rates. 

The  foregoing  remarks  apply  to  the  difficulties  which  attend 
the  making  of  proper  rates  for  various  classes,  but  even 
greater  difficulties  are  met  when  the  attempt  is  made,  as  it 
must  be  made,  to  fix  an  appropriate  rate  for  each  individual 
of  a class.  In  life  insurance  no  such  differentiation  is 
attempted.  Every  man  insured  at  age  twenty-nine  under  the 
same  kind  of  contract  pays  the  same  rate,  and  it  is  assumed 
that  every  insurable  life  at  age  twenty-nine  has  the  same 
expectation.  In  fire  insurance,  however,  no  two  risks  are 
exactly  alike  and  every  detail  of  every  risk  must  be  examined 
and  its  contribution  to  the  total  hazards  of  the  risk  estimated. 
Moreover,  in  fire  insurance  many,  if  not  most  risks,  undergo 
frequent  changes  and  must  therefore  be  re-examined  and 
re-rated  from  time  to  time.  It  is  this  necessity  for  determin- 
ing the  proper  charges  and  allowances  for  the  numerous  differ- 
ences which  characterize  the  construction,  occupancy,  location 


io6 


YALE  INSURANCE  LECTURES. 


and  exposure,  methods  of  heating  and  lighting  and  extent  of 
fire  protection,  not  only  for  every  class  of  risks,  but  also 
for  every  individual  of  each  class,  which  constitutes  the 
greatest  practical  difficulty  to  be  overcome  in  making  a fair 
assessment  of  the  fire  cost. 

Without  trying  to  investigate  the  history  of  the  various 
methods  of  classification  which  have  characterized  the  business 
or  to  give  any  account  of  the  differing  processes  for  making 
rates  which  have  been  attempted  from  time  to  time  by  insur- 
ance companies,  interesting  and  instructive  as  those  subjects 
are,  we  will  now  proceed  to  take  up  a few  of  the  systems  and 
methods  by  which  rates  are  to-day  made. 

Rates  may  be  said  to  be  made  to-day  by  two  processes : 
First,  by  what  is  known  as  the  personal  inspection  or  judgment 
rate  system;  and,  second,  by  carefully  prepared  and  more  or 
less  scientific  schedules. 

The  judgment  system  of  rating  is  rapidly  giving  way  before 
the  use  of  highly  complex  and  specialized  schedules.  It  is 
open  to  serious  and  obvious  criticism,  yet  has  in  times  past 
served  a very  useful  purpose  and  is  not  without  its  good 
features.  A few  words  will  sufficiently  describe  it.  By 
means  of  a more  or  less  complete  system  of  classification, 
companies  ascertained  in  a rough  way  the  average  cost  of 
many  kinds  of  risks,  and  this  information  was  put  into 
the  hands  of  their  special  agents  or  gradually  absorbed  by 
them  in  the  course  of  their  work.  Formerly  special  agents 
did  practically  all  of  the  work  of  making  rates  in  company 
with  local  agents.  When  a town  was  to  be  rated,  these 
average  cost  figures  were  used  as  basis  or  foundation  rates. 
Usually  towns  were  rated  by  committees  of  from  two  to  five 
special  agents  who  acted  for  all  companies.  No  rule  or  regular 
method  of  procedure  governs  the  making  of  rates  under  this 
system.  The  rates  so  made  simply  indicate  the  opinion  or  judg- 


YALE  INSURANCE  LECTURES.  107 

ment  of  the  rate  makers.  Little  attempt  was  made  to  analyze 
the  factors  which  determined  the  judgment  of  the  committee 
as  to  each  risk.  Nevertheless,  since  that  judgment  was  usually 
the  result  of  the  experience  and  observation  of  many  years 
spent  in  such  work,  the  rates  made  were  in  many  cases  quite 
satisfactory  and  equitable  to  a moderate  degree.  No  attempt 
was  made  to  take  account  of  minor  differences,  but  all  good 
features  or  defects  of  construction  and  exposure,  and  also 
all  the  hazards  of  occupancy  and  processes,  were  lumped 
together,  and  if,  as  a whole,  to  the  mind  of  the  raters,  they 
were  sufficient  to  appreciably  differentiate  the  particular  risk 
from  the  average  risk  of  its  class,  a penalty  was  added  to  or 
an  allowance  was  made  from  the  average  rate  which  experi- 
ence had  shown  to  be  about  adequate. 

Such  a system  was  fairly  satisfactory  during  the  years  when 
buildings  as  a rule  were  in  point  of  construction  very  much 
alike,  but  with  the  growth  of  improved  methods  of  building, 
and  with  the  increase  and  improvement  of  the  apparatus  for 
protection  against  fire,  to  say  nothing  of  the  great  changes  in 
business  methods,  such  a system  fails  to  properly  discriminate 
between  risks  of  the  same  class  which  may  differ  widely  in 
many  important  respects.  Moreover,  the  personality  of  the 
raters  under  the  old  system  was  a highly  important  factor — 
to  such  an  extent,  in  fact,  that  different  committees  might 
produce  quite  different  results  when  rating  identical  risks. 
The  system  of  schedule  rating  which  attempts  to  take  into 
account  the  various  features  of  construction,  exposure,  internal 
hazards  and  protection  against  fire,  which  are  peculiar  to  each 
risk,  obviates  these  objections,  though  itself,  as  will  be  shortly 
seen,  open  to  criticism  of  another  nature. 

As  already  hinted,  no  perfect  system  of  apportionment  of 
the  fire  tax  can  be  devised.  On  the  whole,  the  system  by 
schedules  applicable  to  each  class  gives  promise  of  develop- 


io8 


YALE  INSURANCE  LECTURES. 


ment  into  a means  of  fixing  rates  which  will  be  much  more 
equitable  and  satisfactory  than  any  other  method  which  has 
yet  been  followed,  and  there  is  reason  for  hope,  with  more 
perfect  statistics  and  a better  appreciation  of  the  relative 
potentialities  of  the  different  hazards,  that  the  various  sched- 
ules will  ultimately  develop  until  they  come  to  be  universally 
recognized  by  the  public  as  well  as  insurance  officials  as  satis- 
factorily solving,  so  far  as  it  may  be  solved,  the  complex 
problem  involved  in  making  rates. 

In  the  early  days  of  insurance  history  two  rates  only  were 
known, — one  for  buildings  of  brick  construction,  another  for 
frame,  and  these  rates  applied  regardless  of  occupancy. 
Gradually,  as  the  hazards  of  the  different  kinds  of  business 
came  to  be  appreciated,  a system  of  classification  was  begun 
which  has  been  growing  and  enlarging  until  to-day,  nor  has 
its  growth  or  enlargement  by  any  means  reached  its  limit.  At 
the  present  time  many  companies  divide  their  risks  into  over 
a hundred  classes  and  further  sub-divide  each  class  accord- 
ing to  construction,  i.  e.,  whether  brick  or  frame,  and  according 
to  the  class  of  the  town  or  city,  viz.,  whether  protected  or 
unprotected,  in  which  the  particular  risk  may  be  located. 
From  their  experience  with  these  classes  approximations  are 
made  by  companies  of  the  actual  average  cost  of  insuring  each 
class,  but  in  order  to  fix  the  prices  for  the  individuals  of  a 
class  there  is  required  a mass  of  diagrams,  statistics  and 
other  data,  showing  the  particular  features  of  each  risk,  which 
are  almost  infinite  in  number.  This  will  be  apparent  from  the 
statement  that  these  data  include  more  or  less  complete 
descriptions  of  practically  all  buildings  in  the  central  portions 
of  all  cities,  towns  and  villages  of  any  size  in  the  United 
States. 

Companies  as  a whole  are  estimated  to  expend  over  a million 
of  dollars  per  annum  for  rating  purposes.  Single  companies 
expend  as  much  as  $20,000  per  annum  for  maps  alone. 


YALE  INSURANCE  LECTURES.  109 

The  prime  requisite  for  a system  of  rates  is  that  it  shall  so 
far  as  possible  be  uniformly  equitable;  that  is,  it  must  compel 
each  class  of  risk  and  each  individual  of  the  class  to  pay  its 
proper  proportion  of  the  fire  tax.  To  approximate  such  a 
result,  however,  not  only  are  the  data  before  mentioned  neces- 
sary, but  the  amount  of  insurance  to  be  carried  on  each  risk 
must  be  known.  At  least  nine  tenths — Mr.  Dean  says  nineteen 
twentieths — of  all  losses  are  partial.  The  great  majority  are 
small  as  compared  with  the  value  of  property  insured.  It  is 
evident  that,  in  case  of  a partial  loss  destroying  less  than  one 
half  the  value  of  an  insured  property,  a man  who  carries  insur- 
ance to,  say,  50  per  cent,  of  the  value  of  his  property,  secures 
the  same  amount  of  indemnity  as  the  man  who  carries  insur- 
ance amounting  to  80  per  cent.,  though  the  latter  has  paid  a 
much  heavier  tax.  It  follows  that  where,  as  is  usually  the 
case,  there  is  a fire  department  and  water-works,  the  man  who 
carries  insurance  amounting  to  80  per  cent,  of  the  value  of  his 
property  is  entitled  to  a lower  rate  than  the  one  who  carries 
insurance  amounting  to  but  50  per  cent,  of  that  value.  For 
this  reason  all  properly  devised  schedules  or  tariffs  for  making 
rates  are  based  upon  the  use  of  a co-insurance  clause,  usually 
the  80  per  cent,  co-insurance  clause,  which  compels  insurance 
equal  to  80  per  cent,  of  the  value  to  be  carried,  and  penalties 
in  the  shape  of  higher  rates  are  imposed  where  a lower  per- 
centage of  insurance  is  carried.  No  other  means  has  ever 
been  devised  or  is  likely  to  be  devised  which  so  fairly  and 
automatically  apportions  the  insurance  tax  according  to  the 
value  of  property,  just  as  ordinary  taxes  on  real  estate  and 
personal  property  are  supposed  to  be  apportioned.  One  way 
of  stating  the  principle  involved  is  to  say  that  the  expectation 
of  salvage  is  one  of  the  factors  involved  in  making  rates. 

The  schedule  system,  as  its  name  implies,  makes  rates  by 
applying  to  classes  of  risks  and  to  individual  risks  certain 


no 


YALE  INSURANCE  LECTURES. 


predetermined  charges  and  credits  based  upon  the  various 
factors  of  construction,  occupancy,  exposure  and  protection 
against  fire.  In  practice,  in  the  several  states  or  districts  of 
the  country,  many  different  schedules  for  all  classes  of  risks 
are  used,  though  more  than  one  attempt  has  been  made  to 
evolve  a system  of  rating  which  might  be  everywhere  applic- 
able. We  shall  not  be  able  even  to  mention  many  of  these 
numerous  systems,  nor  is  it  necessary,  since  for  the  most  part 
they  differ  in  detail  rather  than  in  principle. 

In  the  case  of  such  simple  classes  as  dwellings,  schools 
and  churches,  where  the  hazards  are  practically  the  same  for 
each  individual,  the  class  rate  is  applied  to  every  risk,  differ- 
ences being  made  only  as  between  brick  and  frame  and  those 
under  or  beyond  the  protection  of  an  efficient  fire  department. 

The  schedules  used  in  rating  the  different  manufacturing 
classes,  such  as  wood-workers,  packing  houses,  flour  mills,  etc. 
(usually  called  special  hazards),  are  made  up  substantially 
according  to  the  following  general  plan : 

First.  The  standard  or  ideal  building  of  the  class  in  ques- 
tion is  described.  This  building  is  standard,  not  only  in 
arrangement  and  construction,  but  often  as  to  its  equipment 
for  extinguishing  fire.  A basis  rate  is  then  assumed  for  a risk 
equalling  the  standard.  This  basis  rate,  while  arbitrarily 
fixed,  is  nevertheless  the  expression  of  the  judgment  of  expert 
raters  as  to  irreducable  foundation  of  hazard  incapable  of 
analysis  and  made  up  of  the  numerous  intangible  and  incal- 
culable things  (including  moral  hazard  and  an  allowance  for 
unknown  causes),  which  is  thought  to  be  inseparable  from 
any  risk  of  the  particular  class  under  consideration,  no  matter 
how  perfect  its  structure  and  arrangement  may  be. 

The  basis  rate  having  been  determined,  the  various  defects 
in  construction,  dangerous  or  improper  factors  of  arrange- 
ment, and  deficiencies  in  the  nature  and  extent  of  the  appara- 


YALE  INSURANCE  LECTURES. 


Ill 


tus  for  fire  protection  are  listed  with  a table  of,  usually  fixed, 
charges  for  each;  usually,  too,  there  are  some  credits  men- 
tioned for  extraordinary  features  of  equipment  or  construction 
too  infrequent  to  be  conveniently  included  in  the  description 
of  the  standard.  Provision  is  also  made  in  such  a schedule 
for  a further  credit  or  charge  for  the  presence  or  absence  of 
the  80  per  cent,  co-insurance  clause,  or  some  other  percentage 
co-insurance  clause,  in  the  contracts.  When  a flour  mill,  for 
example,  is  to  be  rated,  the  assumed  basis  rate  for  flour  mills 
is  used  as  a starting  point  and  to  it  are  added  the  various 
deficiency  charges  which  may  be  found  on  inspection  to  per- 
tain to  the  particular  mill  to  be  rated.  From  the  rate  thus 
obtained  a deduction  is  made  for  any  credits  to  which  the 
mill  is  entitled.  When  the  rate  thus  made  up  is  ascertained, 
the  price  to  be  charged  is  fixed  by  the  allowance  or  charge 
for  the  use  of  the  co-insurance  clause  above  referred  to. 

Many  of  these  schedules  are  so  minute  and  intricate  as  to 
require  the  services  of  an  expert  rater  for  their  application, 
and  therefore,  and  also  for  the  sake  of  economy  and  uni- 
formity, these  schedules  are  applied  to  special  hazards  by  men 
skilled  in  their  use  acting  for  associations  of  companies  in  the 
various  districts.  The  factor  of  exposure  (sometimes  of  great 
importance)  may  be  covered  by  more  or  less  elaborate  charges, 
as  shown  on  some  of  the  sample  schedules  in  your  hands;  or 
more  frequently  in  the  case  of  special  hazards,  together  with 
other  additional  objectionable  features,  is  left  to  the  judgment 
of  the  rater.  This  is  because  special  hazards,  as  a rule,  are 
more  dangerous  to  their  surroundings  than  endangered  by 
them.  Moreover,  they  are  usually  more  or  less  isolated  as 
to  location,  hence  their  chief  hazards  are  internal.  While,  on 
account  of  the  numerous  and  often  hazardous  processes 
involved  and  because  inflammable  material  is  frequently 
handled,  these  risks  might  be  supposed  to  present  unusual 


I 12 


YALE  INSURANCE  LECTURES. 


difficulties  to  the  rater,  they  are  on  the  contrary  easier  to  rate 
with  a reasonable  degree  of  satisfaction,  both  to  the  com- 
panies and  the  owners,  than  the  apparently  more  simple  mer- 
cantile risks,  which  so  far  exceed  them  in  number  and  value. 
The  different  processes  and  dangerous  materials  are,  in  the 
case  of  special  hazards,  conspicuous,  and  their  hazards  com- 
paratively obvious,  hence  their  appraisal  or  estimate  may  be 
the  more  easily  made.  In  these  schedules  many  of  the  more 
serious  defects  are  often  penalized  by  very  severe  charges  in 
order  to  compel  property  owners  to  remedy  them;  indeed, 
one  of  the  chief  merits  of  the  schedule  system  of  rating  as 
a whole  is  that  it  encourages  safe  methods  of  construction, 
arrangement  and  protection,  and  recognizes  them  in  the  rates. 

Another  and  the  chief  argument  usually  advanced  in  favor 
of  schedule  rating  is  that,  since  it  lists  the  various  defects 
of  each  risk  and  the  charges  made  for  the  same,  property 
owners  may  know  why  the  price  which  they  are  compelled  to 
pay  for  insurance  differs  from  that  which  may  be  paid  by  their 
neighbors,  and  hence  may  realize  that  they  are  not  suffering 
from  the  effects  of  arbitrary  discrimination  or  of  personal 
judgment  of  the  rater,  since  it  is  evident  that  the  rate  on 
their  own  property  is  governed  entirely  by  its  own  faults  or 
merits. 

In  some  states  or  districts  as  many  as  thirty  different 
schedules  for  different  classes  of  risks  are  in  use. 

The  rating  of  mercantile  property,  which  comprises  by 
far  the  most  important  class,  both  as  to  the  number  of  risks 
and  value,  with  which  insurance  companies  have  to  deal,  is 
the  most  difficult  technical  task  which  confronts  the  under- 
writer. 

There  are  many  schedules  in  use  for  this  purpose  in  various 
parts  of  the  country,  most  of  which,  however,  have  many 
points  of  resemblance.  The  following  may  be  taken  as  a 


YALE  INSURANCE  LECTURES.  113 

description  of  the  average  schedule  of  this  kind  used  in  towns 
and  cities  of  moderate  size — those  used  in  the  largest  cities  are 
more  elaborate. 

In  most  states  and  districts  the  cities,  towns  and  villages 
are  divided  into  classes — commonly  from  four  to  six  in  num- 
ber— according  to  the  amount  of  protection  afforded  by  the 
water  works  and  fire  department  of  each.  Two  basis  rates — 
one  each  for  brick  and  frame  mercantile  buildings — are  then 
adopted  for  each  class  of  towns.  The  basis  rate  is  usually 
in  the  case  of  brick  buildings  predicated  upon  an  assumed 
type  of  building  adopted  for  that  purpose  and  described  in 
detail  in  the  schedule.  In  order  to  determine  the  rate  on 
any  one  building  or  its  contents  the  proper  basis  rate  is  taken 
as  a foundation,  and  to  it  are  added  the  fixed  additional 
charges  made  necessary  by  its  structural  defects,  which  are 
usually  listed  with  more  or  less  minuteness  in  the  schedule, 
a stated  charge  being  made  for  each  defect.  To  the  rate  of 
the  building  thus  determined  additions  are  made  for  the  expo- 
sure hazards  from  adjacent  risks  according  to  the  table  or 
rule  provided  in  the  schedule.  From  the  figure  thus  obtained 
a deduction  is  made  on  account  of  credits  allowed  for  those 
features  of  construction,  or  of  individual  fire  protection,  which 
may  be  permitted  by  the  schedule.  The  resultant  rate  is  called 
the  unoccupied  building  rate.  It  is  then  further  increased  by 
a charge  made  on  account  of  the  nature  of  the  occupancy, 
such,  for  instance,  as  a drug  store  or  a dry  goods  store,  and 
thus  becomes  the  final  building  rate. 

The  rate  on  the  contents  is  then  made,  frequently  by  an 
addition  to  the  building  rate,  named  in  the  schedule  itself 
as  applying  to  the  particular  kind  of  contents  under  considera- 
tion ; but  more  often  all  kinds  of  contents  are  classified 
roughly  into  from  two  to  four  or  five  classes,  and  an  additional 
charge,  over  and  above  the  building  rate,  to  be  applied  to 
8 


1 14  YALE  INSURANCE  LECTURES. 

the  contents,  is  provided  for  each  class,  and  is  used  in  every 
case  where  contents  which  may  be  embraced  in  that  class  are 
found. 

The  foregoing  applies  to  the  rating  of  brick  mercantile 
buildings  and  their  contents.  Rates  on  frame  mercantile  build- 
ings are  usually  made  by  a more  simple  process. 

In  the  first  place,  all  frame  mercantile  buildings  are  esteemed 
to  be  substantially  alike  for  the  purpose  of  insurance,  the 
differences  in  point  of  construction  which  are  recognized  being 
confined  to  metal  roofs  and  brick  or  iron  coverings  for  side 
walls.  A basis  rate  is  agreed  upon  for  frame  buildings  in 
each  of  the  various  classes  of  towns  into  which  a district  may 
be  divided,  and  charges  are  made  for  occupancy  and  exposures. 
These  charges,  so  far  as  occupancy  is  concerned,  are  usually 
very  few  in  number.  Where  frame  buildings  are  concerned 
the  rate  on  contents  is  seldom  if  ever  higher  than  the  rate 
on  the  building  itself,  and  very  often  less  than  the  building 
rate,  because  a high  rate  on  such  a building  is  usually  due  to 
a heavy  exposure  hazard,  which,  so  far  as  the  contents  are 
concerned,  may  be  overcome  by  their  hasty  removal  when  the 
danger  of  fire  is  imminent. 

The  treatment  of  exposures  in  these  numerous  schedules 
shows  great  variety  of  practice,  especially  as  regards  brick 
buildings.  In  fact,  for  the  most  part  this  important  feature 
in  the  rating  of  mercantile  buildings  and  contents  has  had 
very  inadequate  treatment.  When  brick  buildings  are  exposed 
by  other  risks,  one  method,  very  frequently  used,  is  to  make 
a fixed  charge  for  unprotected  openings  in  side  walls  without 
regard  to  the  character  of  the  exposure.  Another  is  to  add 
to  the  rate  of  the  exposed  risk,  where  there  are  unprotected 
openings,  some  percentage  of  the  rate  of  the  exposing  risk, 
according  to  its  distance  from  the  risk  to  be  rated. 

Many  tariffs,  however,  leave  the  question  of  exposure 
charges  to  the  judgment  of  the  rater,  for  it  is  difficult,  especi- 


YALE  INSURANCE  LECTURES. 


XI5 


ally  in  the  case  of  brick  buildings,  to  provide  a satisfactory 
and  workable  rule  for  such  charges  in  a schedule  designed  to 
be  comparatively  simple.  For  frame  buildings  there  are  usu- 
ally definite  rules  in  the  shape  of  a heavy  fixed  additional 
charge  over  and  above  the  basis  rate  for  each  frame  building 
within  a given  distance — usually  20  feet — of  the  building  to 
be  rated.  Thus,  if  a frame  building  unexposed  carries  a basis 
rate  of  iy2  per  cent.,  75/ioo  of  1 per  cent,  will  be  added  for  every 
frame  building  exposing  it  within  20  feet,  and  also  for  every 
frame  building  which  goes  to  make  up  a continuous  row  of 
wooden  buildings  up  to  some  arbitrary  limit,  such  as  8 per 
cent.,  which  is  assumed  to  cover  the  most  dangerous  hazard 
which  can  be  created  by  a combination  of  frame  mercantile 
buildings.  It  will,  of  course,  be  understood  that  the  basis 
rates,  as  well  as  the  increments  of  charge  made  for  exposures, 
vary  in  the  schedules  used  in  different  parts  of  the  country. 

As  hinted  before,  two  attempts  have  been  made  to  evolve 
systems  or  schedules  for  rating  mercantile  property  which 
might  be  universally  used.  The  first  of  these  schedules  was 
prepared  by  a committee  of  eminent  underwriters  under  the 
chairmanship  of  Mr.  F.  C.  Moore,  then  president  of  one  of 
the  largest  American  insurance  companies,  and  is  called  the 
“Universal  Mercantile  Schedule/’  It,  or  some  modification  of 
it,  is  used  in  many  of  the  large  cities  of  the  country  to-day, 
including  New  York,  Cleveland,  Denver  and  many  others, 
and  it  is,  so  far  as  results  yet  obtained  are  concerned,  the 
most  important  of  any  of  the  tariffs  which  have  ever  been 
issued.  It  is  also,  of  all  rating  schedules,  the  one  which  has 
been  most  carefully  and  minutely  elaborated  and  adjusted  to 
meet  the  almost  infinitely  varied  combinations  of  the  factors 
of  construction,  occupancy  and  protection  which  are  to  be 
found  in  the  mercantile  buildings  of  a large  city. 

This  schedule  was  a great  advance  beyond  anything  before 
known  in  the  history  of  scientific  rating  and  has  exercised  a 


Il6  YALE  INSURANCE  LECTURES. 

very  important  and  growing  influence  upon  the  framers  of 
other  schedules  subsequently  made,  many  of  which  are  but 
imperfect  adaptations  of  the  Universal  Mercantile  Schedule. 
It  is  an  extremely  complicated  and  intricate  schedule  and 
cannot,  therefore,  be  described  or  discussed  in  detail  in  the 
limits  of  this  paper.  A few  extracts  from  the  writings  of 
Mr.  Moore  in  regard  to  it  will  be  given,  which,  in  connection 
with  what  has  already  been  stated  in  regard  to  schedule  rating, 
will  enable  some  idea  of  its  purpose  and  scope  to  be  formed: 
(It  is  suggested  in  this  connection  that  the  student  consult  Mr. 
Moore’s  book  “Fire  Insurance  and  How  to  Build.”) 

“The  mere  fact  that  there  are  more  than  a hundred  features 
of  construction  in  a single  building  which  should  enter  into 
the  consideration  of  its  rate,  irrespective  of  nearly  forty  fea- 
tures of  its  city  or  environment,  nearly  forty  more  different 
features  of  fire  appliances,  to  say  nothing  of  more  than  a 
thousand  possible  hazards  of  occupancy;  and  the  further  fact 
that  no  individual  knowledge  is  equal  to  the  task  of  putting 
a price  upon  so  many  items,  nor  any  individual  memory 
capable  of  remembering  them,  proves,  without  further  demon- 
stration, the  necessity  not  only  of  conference  to  secure  com- 
bined knowledge  for  fixing  prices,  but,  also,  a printed  record 
or  schedule,  to  prevent  omissions  or  mistakes.” 

“In  1891  a committee  of  four  underwriters  was  appointed 
to  prepare  a schedule  for  rating  mercantile  risks  which  should 
be  universal  in  its  application  thoughout  the  country.  Early 
in  their  deliberations  they  reached  the  conclusion  that  such  a 
schedule  should  be  formulated  upon  the  following  lines,  and 
that  it  should  recognize: 

First:  A key-rate — as  to  which  various  cities  and  towns 
differ. 

Second : Charges  for  variations  from  standards  of  construc- 
tion— which  ought  to  be  the  same  everywhere. 


YALE  INSURANCE  LECTURES.  1 17 

Third : Charges  for  hazards  of  occupancy — which  ought  to 
be  the  same  everywhere. 

Fourth:  Charges  for  insuring  contents  according  to  their 
susceptibility  to  damage — which  ought  to  be  the  same  every- 
where. 

Fifth : The  variation  of  these  charges,  according  to  the  con- 
struction of  the  building.  Clearly  the  same  amount  should  not 
be  added,  even  for  the  same  stock,  to  two  different  buildings 
where  one  is  an  exceptionally  good  building  and  the  other 
an  exceptionally  poor  one;  there  should  be  more  difference 
between  the  building  and  stock  rate  in  the  one  case  than  in 
the  other. 

Sixth : The  treatment  of  fire  extinguishing  facilities,  prox- 
imity to  hydrants,  etc.,  for  the  particular  risk  rated,  according 
to  circumstances;  it  being  clear  that  if  the  risk  is  within 
reach  of  hydrants,  steam  engines,  etc.,  and  on  an  eight-inch 
or  larger  water  main,  it  should  rate  differently  from  another 
of  like  kind,  even  in  the  same  town,  if  the  other  risk  be  not 
so  fortunately  located.” 

“So  in  other  items  or  features  of  the  schedule,  the  com- 
mittee found  it  necessary  to  go  into  every  detail  of  hazard, 
leaving  as  little  as  possible  to  the  judgment  of  a rating  expert, 
so  as  not  only  to  save  his  time  and  thought  at  every  stage  of 
the  rating  process,  but  to  prevent,  also,  those  inconsistencies 
of  rating  in  risks  of  one  and  the  same  hazard,  resulting  from 
fluctuations  of  judgment,  which  so  often  produce  dissatisfac- 
tion on  the  part  of  owners  and  result  in  appeals  for  legislative 
interference  with  rating  organizations.” 

“First:  A standard  city  was  conceived  and  described.  It 
involved  level  and  wide  streets,  gravity  water  works,  adequate 
pipe  service  and  other  features  fully  explained. 

“Second : A standard  building  was  described,  which  may  be 
regarded  as  a model  of  ordinary  construction,  not  fire-proof. 

“Third : A key-rate. 


1 18 


YALE  INSURANCE  LECTURES. 


“The  basis  rate  or  starting  point  for  rating  a standard 
building  in  a standard  city  was  fixed  at  25  cents,  after  careful 
consideration  of  the  experience  tables  of  the  companies.” 

Since  buildings  of  this  class  are  to  be  rarely  found,  this 
was  of  course  pure  assumption. 

“From  this  starting  point  or  basis  rate  of  25  cents,  and  to 
obtain  the  key-rate  of  any  city,  or  that  figure  at  which  a 
standard  building  in  the  city  should  be  rated,  additions  were 
made  according  to  the  deficiencies  of  the  city  as  to  water 
works,  fire  department,  building  laws,  inaccessible  or  narrow 
streets,  etc.,  etc.  This  key-rate,  so  determined,  is  thereafter 
used  to  obtain  the  rate  of  any  building  in  the  city  to  be  rated 
by  adding  to  it  charges  for  its  deficiencies  from  the  specifica- 
tion of  a standard  building.” 

For  the  purpose  of  rating  contents  of  buildings  and  in  order 
to  make  occupancy  charges,  no  fewer  than  1,287  varieties  of 
contents  are  listed, * each  with  its  appropriate  fixed  charge  to 
be  added  to  the  building  rate;  and  also  a different  charge  to 
apply  to  the  contents  themselves,  over  and  above  the  final 
building  rate.  Moreover,  a separate  application  for  credits 
for  fire  protection  is  provided  for  the  contents  as  compared 
with  the  building. 

“No  schedule  should  be  framed  upon  a basis  which  does 
not  recognize  a certain  named  percentage  of  insurance  to 
value.” 

“The  universal  schedule,  however,  does  not  enforce  or 
require  any  particular  amount  of  insurance,  but  simply  adjusts 
itself  (by  reductions  from  ascertained  rate  according  to  stipu- 
lated account  of  co-insurance)  to  whatever  amount  the  prop- 
erty owner  elects  to  carry.” 

The  chief  objection  to  this,  or  in  fact  to  any  system  of 
schedule  rating,  is  the  necessity  for  the  constant  use  of  assump- 
tions, not  only  in  determining  the  basis  rates,  but  in  making 


YALE  INSURANCE  LECTURES.  119 

the  charges,  for  each  defect  of  the  construction,  or  for  occu- 
pancy, which  go  to  make  up  the  final  rate. 

A great  deal  of  time  and  a vast  amount  of  comparative 
research  has  been  expended  in  the  endeavor  to  properly 
appraise  the  dangers  incident  to  all  the  various  features  of 
construction,  protection,  occupancy  and  exposure,  yet  it  is 
manifestly  impossible  from  any  obtainable  record  of  experi- 
ence to  assert  that  a retail  drug  store,  for  instance,  will 
make  proper  an  addition  of  exactly  10  cents  to  the  building 
or  an  addition  of  exactly  50  cents  to  the  rate  on  contents 
over  and  above  the  building  rate  in  all  cases. 

A tariff  has  been  devised  by  Mr.  A.  F.  Dean,  of  Chicago, 
called  by  him  a “Mercantile  Tariff  and  Exposure  Formula  for 
the  Measurement  of  Fire  Hazards,”  which  differs  radically  in 
many  respects  from  the  “Universal  Mercantile  Schedule,”  and 
which  has  come  into  very  general  use  in  the  western  states. 
This  tariff  is  intended  to  render  some  of  the  defects  just 
mentioned  less  important,  and  is,  moreover,  founded  on  a 
different  conception  of  the  problem  of  rating.  Instead  of 
endeavoring  to  establish  a basis  rate  for  a standard  risk  in 
a standard  city,  Mr.  Dean’s  tariff  divides  cities  into  six 
classes,  beginning  with  villages  which  have  no  protection 
whatever  and  which  are  known  as  towns  of  the  sixth  class. 
This  is  a very  suitable  basis  for  such  a classification  since  its 
definition  is  simple,  its  existence  real  and  unchanging;  while 
on  the  contrary  our  ideas  of  a standard  city  are  likely  to 
change  from  time  to  time.  From  this  as  a starting  point 
towns  are  graded  according  to  their  protection  up  to  the  first 
class,  which  includes  all  cities  having  protection  in  the  way 
of  water  works  and  fire  department  of  exceptional  complete- 
ness and  efficiency  and  better  than  those  classified  under 
Sections  2 to  6 inclusive.  Moreover,  for  the  purpose  of 
rating,  provision  is  made  for  the  adoption,  as  a starting  point, 


I 20 


YALE  INSURANCE  LECTURES. 


of  a one  story  brick  building  of  ordinary  construction  located 
in  a town  of  the  sixth  class.  This  kind  of  building  is  fully 
described  in  the  tariff.  Such  buildings  are  common  in  towns 
of  that  class.  However,  this  tariff  does  not  attempt  to  name 
the  basis  rates.  They  are  supposed  to  be  adopted  or  selected 
in  each  state  or  district  by  raters  who  have  had  experience 
therein.  This  does  away  with  the  necessity  for  making  ideal 
standards  and  estimating  basis  rates  therefor.  Concerning 
this  matter  of  adopting  basis  rates  Mr.  Dean  holds  that  the 
experience  of  underwriters  enables  them  to  more  readily  esti- 
mate a proper  rate  for  an  ordinary  building,  such  as  may  be 
found  in  great  numbers,  than  for  an  ideal  standard,  which 
represents  a class  with  which  insurance  companies  have  had 
very  little  if  any  experience.  Nothing  more  simple  could  be 
thought  of  as  affording  a starting  point  or  basis  rate  than 
the  one  story  building  selected  by  Mr.  Dean;  nor  could  any 
risk  be  found  for  which  experienced  underwriters  could  more 
readily  or  intelligently  name  a proper  rate. 

This  basis  rate  having  been  decided  upon,  additions  or 
deductions  are  made  for  good  or  bad  features  of  construction, 
occupancy,  protection  or  exposure,  but  since  the  average  build- 
ing is  taken  as  a starting  point  these  charges  and  credits  will 
be  fewer  in  number  than  where  a standard  building  is  taken 
as  the  foundation,  and  charges  made  for  the  numerous  defici- 
encies which  every  ordinary  building  has.  Moreover,  instead 
of  making  these  charges  and  credits  by  means  of  arbitrarily 
fixed  amounts,  the  additions  and  subtractions  are  made  by  the 
percentage  method.  For  example,  in  the  “Universal  Mercan- 
tile Schedules,”  ten  cents  is  added  to  the  rate  of  a building 
having  a retail  drug  store  therein,  whereas  in  Mr.  Dean's 
tariff  a percentage  of  the  previously  ascertained  building  rate 
is  added  for  this  occupancy  and  a similar  method  is  used 
in  making  charges  and  credits  for  various  features  of  con- 


YALE  INSURANCE  LECTURES. 


I 2 I 


struction.  The  system  employed  for  estimating  the  proper 
percentage  additions  to  the  rate  on  account  of  occupancy  is 
especially  ingenious  and  logical — two  additions  are  made  for 
most  occupancies,  one  for  the  causative  hazard  of  the  contents, 
i.  e.,  the  danger  which  their  presence  begets,  the  other  for 
the  extent  to  which  the  contents  are  likely  to  aid  the  spread 
or  intensity  of  a fire. 

Similarly,  the  percentage  plan  is  followed  for  establishing 
basis  rates  for  one  story  brick  buildings  in  towns  of  the  other 
classes:  that  is,  the  basis  rate  for  a town  of  the  third  or 
fourth  class  would  be  ascertained  by  deducting  a certain  per- 
centage from  the  basis  rate  selected  for  a similar  risk  in  a 
town  of  the  sixth  class. 

The  chief  object  in  adopting  the  percentage  system  for 
variations  in  the  factors  affecting  rates  is  that  it  preserves  the 
relativity  of  charges  and  credits  which  are  made  in  rating. 
It  is  manifest  that  where  a basis  rate,  for  example,  is  40  cents, 
an  additional  charge  of  10  cents  for  occupancy  on  account  of 
a drug  store  is  much  more  severe  than  where  the  basis  rate 
is,  say,  80  cents.  With  the  charge  for  a drug  store  occupancy 
of  10  per  cent,  on  the  basis  rate,  however,  this  inequality 
would  be  obviated.  Again,  the  charge  of  12  cents  for  open, 
unprotected  elevators  in  a building  of  moderate  area  and,  say, 
three  stories  in  height,  and  which  in  consequence  of  these 
features  enjoys  a low  rate,  is  relatively  very  much  heavier 
than  the  same  charge  in  the  case  of  a large  six  or  seven  story 
building  of  great  area  which  bears  a high  rate.  In  the  latter 
case  12  cents  would  probably  be  about  one-tenth  of  the  total 
building  rate,  while  in  the  smaller  building  it  would  be  at 
least  20  per  cent.  Moreover,  an  open  elevator  in  a building 
of  unusual  height  or  area  is  a much  more  serious  defect,  and 
is  likely  to  be  responsible  for  much  greater  destruction  of 
property  than  a similar  elevator  located  in  a small  building  of 


122 


YALE  INSURANCE  LECTURES. 


moderate  height.  The  same  reasoning  might  be  applied  to 
the  credits  or  deductions  made  for  favorable  features.  In 
support  of  his  views  on  this  subject  Mr.  Dean  says: 

“If,  under  the  law  of  averages,  a thousand  buildings  of 
given  construction,  occupancy  and  protection  will  show  a given 
ratio  of  loss  to  value  during  a given  period,  under  the  same 
law  a thousand  flues,  hatchways,  skylights,  well-holes,  wooden 
ceilings,  or  other  parts  of  the  building,  of  given  construction, 
will  each  contribute  its  unvarying  quota  of  this  ratio,  hence 
the  several  parts  stand  in  a position  of  unchanging  relativity, 
not  only  to  the  whole  but  each  to  the  others.  Fire  hazard  is, 
by  nature,  a network  of  relativity.  In  constructing  a basis 
schedule  we  necessarily  select  certain  features  of  hazard  as 
separable  and  attach  to  each  of  these  a charge,  while  to  the 
residue  consisting  of  unanalyzable  parts  we  attach  a lump 
charge  and  call  it  a basis  rate.  There  is  no  intrinsic  difference 
between  the  charge  we  call  a basis  rate  and  the  other  charges 
excepting  that  it  includes  all  things  too  obscure,  indefinite  or 
unimportant  to  schedule.  If  under  the  law  of  averages  the 
relativity  between  the  whole  and  its  parts  does  not  change, 
and  the  relativity  among  the  several  parts  themselves  is  con- 
stant, it  follows  that  each  charge  bears  an  unvarying  relation 
to  the  basis  rate,  or,  conversely,  the  basis  rate  a constant 
relation  to  the  other  charges.  This  being  the  case,  it  is  false 
logic  to  treat  the  basis  rate  or  any  of  the  charges  as  a dis- 
sociated element  of  hazard,  for  every  change  in  basis  rate  or 
charge  involves  a disturbance  of  their  mutual  relativity.  The 
real  question  in  establishing  every  charge  is,  What  ratio  of 
the  total  loss  will  this  feature  of  hazard  under  the  law  of 
average  probably  contribute?  When  this  ratio  has  been  estab- 
lished by  judgment  and  experience,  it  should  take  its  place 
in  every  schedule  as  a fixed  ratio  bearing  a constant  relation 
to  the  whole  and  its  several  parts.” 


YALE  INSURANCE  LECTURES. 


123 


Under  this  tariff  the  rates  on  the  contents  of  brick  build- 
ings are  established  through  a differential  added  to  the  occu- 
pied building  rate.  This  differential  is  based  upon  the 
damageability  of  the  contents  by  water,  smoke,  heat,  breakage, 
etc.,  as  the  result  of  fire,  and  represents  the  relative  value  of 
fire  department  protection  to  contents  as  compared  with  its 
value  to  the  building  itself.  The  tariff  contains  a table  of 
differentials  referring  to  about  four  hundred  different  kinds 
of  contents,  and  further  graded  to  correspond  with  ten  differ- 
ent sets  of  basis  rates,  each  set  including  a basis  rate  for  a 
town  of  every  class.  These  differentials  are  also  arrived  at 
by  the  percentage  method,  by  averaging  the  differentials  con- 
tained in  many  previous  tariffs  made  for  unprotected  towns 
and  then  subjecting  these  differentials  to  an  ingenious  scale 
of  percentage  comparisons  with  the  building  as  affected  by  the 
various  grades  of  fire  protection,  according  to  the  theory  that 
the  greater  the  damageability  of  the  contents  the  less  valuable 
to  them — as  compared  with  the  building — is  the  protection 
against  fire  afforded  by  water  works  and  fire  departments. 

A separate  schedule  based  upon  similar  principles  is  devised 
for  frame  buildings,  by  which  rates  for  frame  buildings  and 
their  contents  in  a city  or  town  of  any  class  may  be  readily 
ascertained  when  once  a basis  rate  has  been  adopted  for  an 
ordinary  shingle  roof  frame  building  in  a sixth  class  town. 
One  important  difference  between  the  brick  and  frame  sched- 
ules to  be  noticed  is,  that  the  differential  for  contents  in  the 
case  of  exposed  frame  buildings  depends  upon  their  remov- 
ability instead  of  their  damageability,  and  a table  of  contents 
graded  according  to  their  removability  is  provided. 

The  matter  of  exposure  charges  and  hazards  is  treated  in  a 
separate  department  of  the  tariff  called  the  exposure  formulae. 
These  formulae  enable  the  rater  to  make  additions  to  the  rates 
of  both  brick  and  frame  buildings  and  their  contents  on 


124  YALE  INSURANCE  LECTURES. 

account  of  exposure  hazards  by  means  of  a highly  ingenious 
exposure  table  graduated  with  reference  to  the  construction  of 
buildings,  the  distances  between  risks  which  affect  each  other, 
the  amount  of  fire  department  protection,  and  the  hazards  of 
the  exposing  risks.  This  table  is  also  made  up  on  the  per- 
centage system,  each  risk  radiating  a percentage  of  its  own 
rate  or  absorbing  a percentage  of  the  rate  of  the  adjoining 
risks.  The  theoretical  considerations  upon  which  this  table 
and  its  applications  are  based  are  given  below  in  Mr.  Dean's 
own  language : 

'‘External  exposures  are  classified  under  three  heads : 

“a.  Radiated  exposure,  consisting  of  the  proportion  of 
its  own  hazard  a risk  radiates  toward  exposed  risks. 

“b.  Absorbed  exposure,  consisting  of  the  proportion  of 
radiated  hazard  absorbed  by  an  exposed  risk. 

“c.  Transmitted  exposure,  or  the  proportion  of  the  hazard 
a risk  absorbs  from  one  side,  that  is  transmitted  by  it  to  a risk 
on  the  other  side. 

“Under  the  above  classification,  it  is  proper  to  bear  in  mind : 

“First : That  every  exposing  risk  radiates  some  ratio  of  its 
own  hazard  towards  exposed  risks. 

“Second : That  every  exposed  risk  absorbs  some  ratio  of 
this  radiated  exposure. 

“Third : That  every  risk  transmits  £ome  ratio  of  the  hazard 
it  absorbs. 

“Fourth : That  radiated,  absorbed,  and  transmitted  exposure 
are  all  modified  by  structure,  clear  space,  and  fire  department 
protection. 

“In  view  of  the  numerous  ratios  and  ratios  of  ratios  found  in 
the  problem  of  measuring  exposures,  the  necessity  for  some 
fixed  standard  of  comparison  is  clear,  because  a standard  is 
the  first  essential  in  all  measurement — it  is  equally  clear  that 
as  ratios  are  to  be  measured  the  standard  must  be  a ratio  and 


YALE  INSURANCE  LECTURES. 


I25 


not  a quantity.  Again,  if  we  view  exposure  from  the  stand- 
point of  cause  and  effect,  it  is  evident  that  radiated  exposure 
is  to  be  taken  as  cause;  hence  it  is  necessary  to  select  some 
ratio  of  the  hazard  of  the  exposing  risk  as  a standard. 

“In  selecting  any  standard  of  measurement,  it  is  proper  to 
choose  that  which  is  most  generally  available  and  most  free 
from  change.  These  qualities  are  found  in  the  greatest  degree, 
perhaps,  in  the  exposure  of  frame  buildings  by  frame  build- 
ings. In  existing  tariffs,  there  is  substantial  agreement  in 
granting  that  a frame  building  transmits  all  the  exposure 
radiated  towards  it  by  other  contiguous  frames,  and  while 
there  is  a considerable  diversity  in  the  ratio  of  radiated  expo- 
sure in  the  several  tariffs,  they  approach  nearer  to  uniformity 
in  this  ratio  than  in  any  other  feature  of  exposure.  An 
examination  of  different  state  tariffs  shows  a range  of  expo- 
sure charge  in  unprotected  frame  rows  from  about  one-third 
to  one-half  the  hazards  of  the  exposing  risk.  The  average  of 
all  tariffs  approximates  closely  to  40  per  cent.,  while  under  the 
different  grades  of  protection  this  ratio  decreases  in  proportion 
to  the  protection. 

“It  can  hardly  be  disputed  that,  under  like  protection,  like 
buildings  radiate  like  ratios  of  their  own  hazard,  and  if  this 
be  true  the  standard  of  radiated  exposure  under  any  given 
grade  of  municipal  protection  should  be  the  same  everywhere ; 
hence  all  tariffs  should  agree  in  the  adoption  of  a common 
standard.” 

Whatever  may  be  thought  of  the  brick  and  frame  sched- 
ules, and  though  founded  upon  scientific  principles  and 
worked  up  according  to  scientific  methods  they  will,  un- 
doubtedly, be  criticised  as  to  details,  it  is  the  writer's  belief 
that  the  exposure  formulae,  at  least,  will  come  to  be  recog- 
nized as  exhibiting  the  most  satisfactory,  logical  and  adequate 
treatment  known  up  to  this  time,  of  this  highly  complex  and 


126 


YALE  INSURANCE  LECTURES. 


hitherto  maltreated  department  of  the  science  or  business  of 
making  rates  for  mercantile  risks.  A detailed  explanation  of 
them  is  impossible  within  the  limits  of  this  paper,  which, 
indeed,  must  be  considered  as  an  introduction  to  the  study 
of  rating  systems  rather  than  an  exposition  of  their  methods 
and  practice.  Moreover,  some  little  study  is  required  in  order 
to  understand  the  use,  or  to  appreciate  the  great  value  of  these 
exposure  formulae.  Nor  would  it  be  possible  for  any  one 
without  large  experience  to  realize  the  difficulties  which  must 
be  overcome  in  any  successful  attempt  to  construct  a logical 
and  workable  scheme  for  the  proper  measurement  and  dis- 
tribution of  exposure  hazards.  Mr.  Dean's  tariff  formulae  as 
now  published  are  intended  for  use  in  towns  and  cities  of 
ordinary  size  and  would  require  additional  elaboration  for  use 
in  the  largest  cities.  There  is  no  reason  why  tariffs  or  sched- 
ules based  upon  the  same  principles  should  not  be  made 
for  all  kinds  or  classes  of  risks,  manufacturing  as  well  as 
mercantile. 


Losses  and  Adjustments 


MISCELLANEO  US 

BY  RICHARD  M.  BISSELL 

In  a previous  lecture  some  account  was  given  of  the 
various  hazards  or  causes  which  are  responsible  for  the  fire 
loss,  and  the  relative  activities  of  these  causes  in  producing 
fires  were  described.  We  now  come  to  look  at  the  fire  waste 
from  a different  point  of  view  and  shall  consider  very  briefly 
the  distribution  of  fires  and  of  the  losses  ensuing  therefrom, 
not  only  as  to  location  and  time,  but  as  to  the  different  classes 
of  property  affected. 

Speaking  in  a very  general  way,  we  may  state  that  fire 
hazards  in  the  greatest  numbers  and  in  their  most  active 
states  are  to  be  found  in  those  centers  of  life  where  the  com- 
mercial and  manufacturing  activities  of  men  are  most  varied 
and  most  congested,  and  where  these  activities  are  carried  on 
with  the  greatest  zeal  and  stress.  It  is  therefore  to  be 
expected  that  in  our  large  cities  should  occur  a great  propor- 
tion of  the  total  number  of  fires,  and  the  facts  justify  this 
expectation.  In  them  also  the  most  serious  destruction  of 
values  occurs.  The  multifarious  activities  above  referred  to 
not  only  create  numerous  causes  for  fires  but  are  also  respon- 
sible for  the  aggregation  of  enormous  quantities  of  highly 
valuable  and  destructible  commodities  and  buildings  contain- 
ing them.  Those  districts  of  our  large  cities  which  are  most 
advantageously  and  conveniently  located  for  commercial  and 
manufacturing  pursuits,  tend  to  attract  to  themselves  the  fac- 
tories, stores,  and  warehouses  wherein  are  housed  the  machin- 


128 


YALE  INSURANCE  LECTURES. 


ery  and  goods  which  make  up  the  chief  material  wealth  of 
such  communities. 

These  districts  are  chiefly  determined  as  to  their  areas, 
outlines,  and  sub-divisions  by  various  circumstances  connected 
with  the  topography  and  gradual  development  of  the  cities 
wherein  they  occur,  the  most  important  controlling  circum- 
stances being  those  which  arise  in  connection  with  receiving 
and  shipping  facilities;  as,  for  example,  proximity  to  the 
water  front  in  a sea  port,  or  to  the  railroad  terminals  in  an 
inland  city. 

In  view  of  these  considerations,  it  is  to  be  expected  that  we 
should  find  such  crowded  areas — or  congested  areas,  as  they 
have  come  to  be  called — arranged  without  much  regard  for  the 
danger  of  sweeping  fires.  The  most  important  factors  of 
arrangement  creating  this  danger  are  narrow  streets,  across 
which  flames  may  readily  leap,  and  city  blocks  so  large  that 
they  encourage  either  the  erection  of  buildings  of  great  depth, 
in  which  fires  cannot  well  be  fought,  or  render  necessary 
alleys  or  courts  for  light  and  ventilation,  which  greatly  aid  the 
rapid  spread  of  fire. 

Were  it  not  for  the  various  public  and  private  appliances 
for  extinguishing  fires,  and  those  devices  for  hindering  the 
communication  of  fire,  which  were  described  in  the  lecture  on 
Fire  Protection  Engineering,  not  one  of  the  congested  areas  of 
our  large  cities  could  endure  a year.  As  it  is,  the  frequency 
of  disastrous  conflagrations  in  such  centers  compels  recog- 
nition of  the  fact  that  the  danger  inherent  in  the  juxtaposition 
of  vast  quantities  of  inflammable  material  in  these  centers 
does  not  receive  anything  like  necessary  or  proper  attention 
from  the  public  at  large,  the  legislatures  or  other  governing 
bodies.  It  would  seem  that  ordinary  prudence  should  induce 
individuals  and  communities  to  take  all  possible  precaution 
against  a constantly  threatening  peril  of  such  vastly  destruc- 


YALE  INSURANCE  LECTURES. 


129 


tive  possibilities;  and  yet  a careful  inspection  of  the  crowded 
portions  of  all  of  our  large  cities  will  reveal  countless  defects 
in  construction,  negligences  in  precaution,  and  inadequacies  in 
protection  which,  when  realized,  give  cause — not  for  wonder 
at  the  number  and  extent  of  the  conflagrations  which  do  occur 
— but  rather  for  surprise  that  they  do  not  occur  in  greater 
numbers. 

The  recent  conflagration  at  Baltimore  gives  a very  good 
example  of  how  the  crowded  arrangement  of  a business  district, 
poor  methods  of  construction,  and  the  non-observance  of  avail- 
able means  for  preventing  the  spread  of  fire  from  one  building 
to  another,  make  ready  for  widespread  disaster.  Baltimore  was, 
in  some  important  respects,  better  equipped  for  fighting  fire 
than  most  cities  of  its  size.  Its  water  supply  was  ample  and  did 
not  once  fail  throughout  the  fire,  although  the  demands  made 
upon  it  were  enormous  and  were  augmented  by  the  waste 
from  hundreds  of  broken  service  pipes  in  the  destroyed  build- 
ings. Yet,  though  the  fire  started  in  a building  of  more  than 
ordinarily  good  construction,  located  so  as  to  be  accessible 
from  three  sides,  the  fire  was  communicated  to  other  buildings 
by  an  explosion  due  to  unknown  causes,  almost  immediately 
passed  beyond  control  of  the  fire  department  and  thereafter 
spread  from  block  to  block  with  a rapidity  almost  incredible. 

The  tremendous  extent  of  this  fire  and  the  enormous 
destruction  of  property  were  primarily  due  to  the  following 
causes : 

Many  of  the  streets  were  narrow  and  many  of  the  build- 
ings were  built  with  inflammable  roofs  and  cornices.  For  the 
sake  of  convenience,  openings  had  been  made,  in  hundreds  of 
cases,  in  the  walls  between  buildings;  and  finally  and  chiefly, 
the  great  majority  of  the  buildings  in  the  burned  district  had 
numerous  wholly  unprotected  door  and  window  openings  on  to 
the  narrow  streets  and  alleys,  or  into  the  courts  which  were 


9 


130 


YALE  INSURANCE  LECTURES. 


used  for  purposes  of  light  and  ventilation.  These  features  of 
construction  are  commonly  known  to  be  dangerous,  but  ordi- 
narily the  fire  department  is  relied  upon  to  offset  them. 
When,  however,  a fire  gets  beyond  the  control  of  the  depart- 
ment, all  of  these  dangerous  factors  come  at  once  into  play 
and  are  largely,  if  not  altogether,  responsible  for  the  great  loss 
%hich  ensues.  Inflammable  material  separated  from  a blazing 
structure  by  glass  windows  only,  will  take  fire  almost  as 
quickly  as  though  it  were  piled  in  the  street.  Wooden  cor- 
nices will  ignite  when  exposed  to  a hot  fire  at  a considerable 
distance  from  it,  say,  one  hundred  feet  or  more. 

The  probabilities  are  that,  had  the  buildings  in  the  vicinity  . 
of  the  origin  of  the  Baltimore  conflagration  been  provided 
with  fireproof  roofs  and  cornices,  and  had  all  exterior  wall 
openings  been  protected  by  approved  fire  shutters  or  doors, 
there  would  have  been  no  conflagration.  In  other  words, 
conflagrations  are  preventable  and  unnecessary.  Just  at  pres- 
ent, when  the  recollections  of  Baltimore  are  still  fresh,  and 
are  kept  so  by  the  subsequent  disastrous  fires  at  Rochester 
and  Toronto,  the  cities  of  the  country  are  more  or  less 
active  in  their  efforts  to  create  safe  conditions.  Similarly, 
after  the  Iroquois  Theater  disaster  in  Chicago  much  was 
done  in  the  theaters  throughout  the  country  to  make  theaters 
less  dangerous.  However,  many  if  not  most  theaters  are 
still  capable  of  duplicating  the  Chicago  horror,  and  most 
of  our  cities  are  still  in  a condition  which  invites  conflagration. 
Nor,  it  is  to  be  feared,  can  the  cities  be  relied  upon  to  take 
any  action  which  will  largely  eliminate  this  danger.  Rather 
must  we  expect  that  the  fear  of  conflagration  will  cause  insur- 
ance companies  to  impose  such  heavy  penalties  in  the  way  of 
increased  rate  charges,  where  there  are  dangerous  features  of 
construction,  lack  of  adequate  protection,  and  other  factors 
which  invite  sweeping  fires,  as  to  compel  the  adoption  of 
proper  safeguards. 


YALE  INSURANCE  LECTURES.  13 1 

The  best  obtainable  reports  indicate  that  since  1820  property 
amounting  in  value  to  about  five  hundred  million  of  dollars 
has  been  destroyed  in  conflagrations  in  the  United  States. 

In  a former  lecture  the  relative  activity  of  the  principal 
hazards  was  touched  upon,  and  it  may  be  interesting  now  to 
note  the  extent  to  which,  relatively,  some  of  the  different 
classes  of  risks  suffer  from  fire.  The  available  data  upon 
which  we  must  rely  for  information  as  to  the  distribution 
of  losses,  and  as  to  the  potency  of  the  different  hazards  as 
well,  is  by  no  means  exact,  and  due  allowance  must  be  made 
for  the  errors  arising  from  imperfect  reports  and  the  absence 
of  reports  in  many  cases.  Yet,  for  our  purposes  of  comparison, 
we  may  accept  the  obtainable  figures  as  relatively  correct  and 
as  approximately  indicating  actual  results. 

If  we  divide  the  buildings  of  any  town  or  city  into  three 
general  classes,  namely:  (a)  dwellings  and  barns;  (b)  mer- 
cantile buildings,  and  (c)  factories,  including  in  the  latter  all 
risks  where  power  is  used  to  any  considerable  extent,  we  shall 
find  that  the  dwellings  greatly  exceed  in  number  the  buildings 
of  the  other  two  classes,  and  that  again  the  stores  far  exceed 
the  factories.  It  is  to  be  expected,  therefore,  that  the  greatest 
number  of  fires  will  occur  in  dwellings,  especially  since  defec- 
tive flues  and  dangerous  heating  apparatus — the  most  fre- 
quently operating  causes  for  fires — are  more  often  to  be  found 
in  dwellings  than  elsewhere.  The  facts  justify  this  expecta- 
tion. In  a natural  and  logical  order,  the  fires  in  mercantile 
risks  again  largely  exceed  in  number  those  which  occur  in 
factories.  The  same  order  does  not  prevail,  however,  when 
the  value  of  the  property  destroyed  in  the  several  classes  is 
tabulated.  It  is  obviously  true  that,  as  a rule,  far  greater 
values  are  exposed  to  fire  in  a mercantile  or  manufacturing 
risk  than  in  a dwelling.  Moreover,  such  risks  are  more 
inflammable  and  are  apt  to  lack  the  constant  supervision  which 


i32 


YALE  INSURANCE  LECTURES. 


prevails  in  a dwelling-house  where  fires  are  usually  quickly 
discovered  and  in  a majority  of  cases  as  quickly  extinguished. 

The  experience  of  eighteen  years  throughout  the  United 
States  gives  approximately  the  following  results : 


Class.  Number  of  Fires.  Value  Destroyed. 

Dwellings  and  barns 550,000  $470,000,000 

Mercantile  risks 200,000  700,000,000 

Manufacturing  risks 80,000  550,000,000 


from  which  it  will  be  seen  that  the  destruction  of  value  in  the 
average  loss  of  the  dwelling  class  is  about  one-fourth  that 
which  is  caused  by  the  average  mercantile  loss ; and  this  again 
is  about  one-half  that  caused  by  the  average  fire  in  a manu- 
facturing risk.  Of  the  total  number  of  fires  nearly  50  per 
cent,  occur  in  dwellings;  something  over  25  per  cent,  in 
mercantile  risks ; and  about  8 per  cent,  in  manufacturing  risks. 

The  progress  of  the  fire  wave  throughout  the  year  is  not 
without  interesting  features  and  can  be  best  shown  by  a 
diagram  or  plat  indicating  the  record  of  a long  series  of 
years.  Such  a diagram,  showing  both  the  property  loss  and 
the  number  of  fires  by  months,  is  here  presented.  It  is  based 
upon  the  record  of  twenty-eight  years  prior  to  1903,  and  since 
no  great  conflagration  occurred  during  that  period,  it  may  be 
fairly  held  to  exhibit  the  normal  relative  experience  of  the 
different  months. 

The  course  of  the  heavy  line  shows  the  total  property 
destruction  by  months  for  twenty-eight  years. 

The  light  line  shows  the  aggregate  number  of  fires  for 
twenty-eight  years  by  months. 

This  plat  indicates  that  the  shape  of  the  fire  curve  through- 
out the  year  is  governed  in  large  measure  by  the  seasons. 
The  maximum  destruction  occurs  during  the  cold  winter 


tto.  P+e  ft  i*>  w 000 

‘ID  ‘ ^ 


Losses  BY  MotvtKs 


YALE  INSURANCE  LECTURES. 


*33 


months  and  the  minimum  during  the  summer  months,  when 
there  is  less  use  of  fire  for  heating  purposes,  and  when, 
therefore,  the  hazards  which  of  all  hazards  are  most  fruitful 
of  destruction,  namely — defective  flues  and  heating  apparatus — 
have  their  smallest  opportunity. 

As  might  be  expected,  the  curve  reaches  its  lowest  point  in 
the  early  summer,  when  the  millions  of  shingle  roofs,  the  for- 
ests, the  prairies,  the  lumber  yards,  and  other  inflammable 
substances  are  still  somewhat  moist  from  the  spring  rains  and 
are  less  likely  to  ignite  from  sparks  and  other  causes  than 
later  in  the  summer,  when  they  have  been  subjected  to  the 
dry  parching  winds  of  July  and  August  and  to  the  drouth 
which  so  often  prevails  in  midsummer  in  many  sections  of  the 
country  and  acts  as  a predisposing  cause  for  the  ready  incep- 
tion and  rapid  spread  of  fire. 

The  curve  as  presented  shows  one  noticeable  irregularity. 
This  occurs  in  the  month  of  July.  A fainter  line  indicates 
the  course  which  the  curve  might  reasonably  have  been 
expected  to  follow.  Instead  of  this  course,  however,  an  abrupt 
rise  is  seen.  The  average  loss  for  July  has  been  $9,831,000, 
whereas  the  normal  curve  would  indicate  an  average  loss  of 
about  $8,725,000.  This  variation  can,  with  little  chance  of 
error,  be  attributed  to  the  celebration  of  the  Fourth  of  July, 
which  would  seem  to  be  responsible,  therefore,  for  the  loss  by 
fire  each  year  of  property  whose  value  exceeds  one  million  of 
dollars.  The  average  number  of  fires  in  July  also,  no  doubt 
for  the  same  reason,  is  abnormal,  exceeding  the  average  of 
June  and  August  by  about  four  hundred  and  fifty.  In  fact, 
the  record  for  ten  years  shows  a larger  average  number  of 
fires  in  July  than  in  any  other  month  of  the  year. 

The  slight  depression  in  the  curve  shown  during  September 
may  well  be  due  to  the  fact  that  in  September  the  fall  rains 
begin,  thus  lessening  the  susceptibility  of  buildings  to  fire, 


J34 


YALE  INSURANCE  LECTURES. 


while  at  the  same  time,  in  most  parts  of  the  country,  the 
use  of  heating  apparatus — the  chief  apparent  cause  for  the 
augmented  losses  of  the  winter  months — has  not  yet  begun. 

The  geographical  distribution  of  loss  seems  to  closely 

approximate  that  of  the  population  and  material  wealth.  The 
largest  number  of  fires  occur  and  the  greatest  values  are 
destroyed  in  the  four  most  populous  and  wealthy  states; 

namely — New  York,  Pennsylvania,  Illinois,  and  Ohio,  in  which 
states  the  total  property  loss  for  twenty-eight  years  is  as 
follows : 

New  York  $450,000,000 

Pennsylvania  270,000,000 

Illinois  196,000,000 

Ohio 181,000,000 

It  does  not  follow  from  this,  however,  that  the  fire  cost — that 
is,  the  percentage  of  loss  to  insured  property  as  compared  with 
the  amount  of  insurance  carried  thereon — varies  in  the  same 
way.  On  the  contrary,  New  York  State  has  the  lowest  burn- 
ing ratio  of  any  of  the  United  States,  and  Pennsylvania, 
Illinois,  and  Ohio  are  all  much  below  the  average  in  this 
respect.  In  other  words,  while  the  actual  loss  in  these  states 
is  greater  than  elsewhere,  the  relative  loss  as  compared  with 
the  population  and  wealth  is  less  than  is  usually  found  in 
other  states,  from  which  we  may  properly  conclude,  perhaps, 
that  better  fire  protection,  better  care,  and  better  methods  of 
building  are  to  be  found  in  those  sections  where  the  popula- 
tion and  wealth  are  most  centered.  This  conclusion  is 
strengthened  by  the  fact  that  the  highest  burning  ratios  are 
to  be  found  in  Arizona,  Florida,  Indian  Territory,  and  North 
Dakota,  communities  where  the  population  is  sparse  and  the 
material  wealth,  comparatively  speaking,  small.  The  burning 
ratio  of  Arizona  is  over  five  times  that  of  New  York,  and 


“The  figures  exhibiting  the  burning  ratio  represent  decimal  fractional  parts  of  ifi  of  the  total  amount  at  risk — not  the 
fractional  parts  of  the  entire  amount  at  risk  (see  table,  page  152).“ 


YALE  INSURANCE  LECTURES. 


I35 


accordingly  the  average  rate  paid  for  insurance  in  Arizona 
is  over  four  times  that  paid  in  New  York,  which  state  enjoys 
a lower  rate  of  insurance  taxation  than  any  other  state  in 
the  Union,  and  properly  so  in  view  of  its  low  burning  ratio. 

These  brief  and  condensed  statements  naturally  lead  up  to 
the  consideration  of  the  general  subject  of  the  relation  exist- 
ing between  the  fire  cost,  the  loss  ratio,  and  the  rate  of  insur- 
ance taxation.  The  accompanying  plat  will  be  helpful  in  this 
matter.  On  this  plat  the  unbroken  line  indicates  the  history  of 
the  burning  ratio — the  true  measure  of  cost — from  1891  to  1903, 
inclusive.  The  dotted  line  represents  the  varying  percentage 
charges  or  rates,  i.  e.,  the  rate  of  taxation  levied  by  the  insur- 
ance companies;  while  the  broken  line  shows  the  loss  ratio 
incurred  by  the  companies  under  these  conditions. 

To  insure  clear  understanding,  please  keep  in  mind  that  by 
burning  ratio,  or  fire  cost,  is  meant  that  percentage  of  the 
amount  of  liability  assumed  by  companies  which  is  made  pay- 
able by  fire;  and  that  by  loss  ratio  is  meant  that  percentage 
of  the  premium  income  which  is  required  to  pay  incurred 
losses.  Suppose,  for  example,  an  insurance  company  writes 
insurance  policies  amounting  to  $30,000,000  and  receives  an 
income  in  premiums  therefor  of  $3,000,000.  Suppose,  also,  that 
it  suffers  losses  under  these  policies  amounting  to  $2,000,000. 
Then  it  will  have  lost  a/3o  of  the  total  amount  of  its  liability 
and  2/z  of  its  premium  income.  2/3o,  therefore,  or  .066,  will 
express  its  burning  ratio  or  fire  cost,  and  2/z  or  .66,  will 
express  its  loss  ratio.  It  is  manifest  that  the  loss  ratio  is  gov- 
erned by  the  combined  influence  of  the  burning  ratio  and  the 
rate  of  taxation.  In  the  last  analysis,  however,  the  rate  of 
taxation  also  is  governed  by  the  burning  ratio. 

A low  loss  ratio  means  a large  percentage  of  profit.  At  a 
time  when  a low  ratio  prevails,  competition  for  business 
becomes  very  keen  and  many  companies  begin  to  offer  more 


1 36 


YALE  INSURANCE  LECTURES. 


favorable  terms.  In  order  to  retain  their  customers,  other 
companies  are  forced  to  also  reduce  prices  and  thus  the 
average  rate  is  gradually  cut  down.  So  utterly  impossible  is 
it  to  long  maintain  prices  at  a level  which  will  afford  large 
profits,  that  conservative  and  far-seeing  underwriters  are  quite 
as  often  opposed  to  attempted  advances  in  rates  as  favorable 
to  them. 

Referring  now  to  the  chart:  In  1891  the  burning  ratio 
was  above  the  average,  but  owing  to  preceding  favorable  years 
— especially  1890 — the  average  rate  had  fallen  to  a very  low 
point.  Consequently,  the  loss  ratio  was  fairly  high.  More- 
over, the  burning  ratio  increased  in  1892,  and  in  1893  reached 
the  highest  point  recorded  for  many  years,  or  perhaps  in  any 
year  during  which  no  great  conflagration  occurred.  Accord- 
ingly, during  1892  and  1893  rates  were  advanced  repeatedly, 
the  average  rate  increasing  about  10  per  cent. 

In  view  of  the  enormous  amount  of  risks  carried,  this 
increase  in  rate  meant  a very  large  increase  in  the  insurance 
tax.  In  fact,  the  premiums  collected  in  1893  exceeded  those  of 
1891  by  over  seventeen  millions  of  dollars,  about  double  the 
amount  of  increase  which  would  have  ensued  from  the 
increased  amount  of  liability  assumed.  When  the  books  of 
companies  were  balanced,  as  required  by  law,  at  the  end  of 
1893,  that  year  was  found  to  have  been  the  most  disastrous 
year  in  the  history  of  the  business,  barring  conflagration  years. 
Companies  therefore  entered  upon  1894  with  the  belief  that 
rates  were  still  too  low,  and  accordingly  rates  were  made  even 
higher,  by  five  points,  in  1894.  During  that  year,  however,  and 
for  the  three  succeeding  years,  the  fire  cost  decreased  each 
year  and  reached  in  1897  the  lowest  point  recorded  in  the 
entire  period  of  thirteen  years.  At  the  same  time  and  in 
consequence  of  this  decrease  the  average  rate  receded.  As 
may  be  seen,  the  course  of  the  burning  ratio  and  of  the 


YALE  INSURANCE  LECTURES. 


*37 


average  rate  is  shown  on  the  chart  by  lines  almost  parallel 
from  1893  to  1897.  However,  changes  in  the  average  rate, 
being  caused  by  the  burning  ratio,  follow  the  latter  in  point 
of  time  and  are  usually  about  one  year  later  than  the  experi- 
ence which  determines  them.  (Note  the  dip  in  the  burning 
ratio  in  1893  and  the  dip  in  the  average  rate  in  1894.) 
Accordingly,  the  years  from  1894  to  1897  were  highly  profit- 
able. In  1898,  however,  the  burning  ratio  began  to  ascend 
once  more,  while  rates,  still  under  the  influence  of  the 
extremely  favorable  record  of  1897,  continued  to  decline. 
Nevertheless,  the  year  1898  as  a whole  was  a good  one, 
especially  during  the  later  months,  and  underwriters  entered 
1899  without  any  strong  incentive  to  advance  prices.  In  fact, 
the  average  rate  advanced  but  little  in  that  year,  though  the 
burning  ratio  was  excessive. 

The  result  of  this  combination  of  a low  and  stationary  aver- 
age rate  with  a rapidly  increasing  burning  ratio  was  that  the 
loss  ratio  jumped  to  a point  that  meant  a serious  loss  on  the 
year’s  business  and  rates  began  to  advance  once  more,  while 
the  burning  ratio  receded  slightly — not  enough,  however,  to 
create  a profit  for  1900  or  to  check  the  accelerating  advance  in 
rates.  This  advance  continued  throughout  1901,  during  which 
year  there  was  a further  very  slight  recession  in  the  burning 
ratio,  so  that  companies  ended  that  year  with  books  nearly 
balanced  as  to  income  and  outgo,  though,  when  the  added 
reserves  necessary  to  care  for  an  increasing  business  were 
taken  into  account,  the  year  was  a losing  one.  Nevertheless, 
there  can  be  little  doubt  that  under  normal  conditions  the  year 
1902,  barring  an  increase  in  the  burning  ratio,  which  did  not 
occur,  would  have  yielded  a profit,  because  of  the  natural 
tendency  of  rates  to  continue  to  advance  in  the  absence  of 
that  condition  of  things  which,  and  which  only,  seems  to  bring 
about  a reduction,  namely — abnormal  profits.  But  the  year 


138  YALE  INSURANCE  LECTURES. 

1902  was  full  of  abnormal  experiences.  Hardly  had  the  results 
of  the  work  of  the  year  1901  been  ascertained  when,  in  Febru- 
ary, two  conflagrations  followed  one  another  in  rapid  succes- 
sion. These  disasters  occurred  at  Waterbury,  Connecticut,  and 
Paterson,  New  Jersey,  and  together  destroyed  property  valued 
at  about  seven  million  of  dollars.  These  fires,  coming  after 
a period  of  three  years  during  which  there  had  been  no  profit 
in  the  business,  caused  consternation  in  fire  insurance  circles. 
The  officers  of  most  companies  believed  that  another  unprofit- 
able year  was  in  store  and  that  the  loss-paying  ability  of  many 
of  the  companies  would  be  seriously  jeopardized  unless  some 
radical  action  was  taken.  So  widespread  was  this  belief  and 
so  urgent  appeared  the  necessity  for  immediate  action,  that 
almost  without  exception  companies — some  by  formal  agree- 
ment, others  by  individual  action — took  steps  in  April,  which 
resulted  in  advancing  the  average  annual  rate  for  1902  by 
twelve  points  and  carried  it  to  a figure  not  before  reached  in 
the  recorded  history  of  the  business. 

This  was  accomplished  by  arbitrarily  advancing  the  existing 
prices  for  many  kinds  of  property — the  most  hazardous — 25 
per  cent.  It  was  an  abnormal  and  radical  method  of  pro- 
cedure, yet  such  was  the  temper  and  such  the  apprehensions 
of  underwriters  that  few  could  be  found  who  seriously  opposed 
the  step  or  doubted  its  wisdom. 

No  sooner  had  this  action  been  taken,  however,  than  the 
fire  record  began  suddenly  to  improve  and  continued  to  be 
highly  favorable  throughout  the  balance  of  the  year,  so  that 
as  events  proved  and  despite  its  untoward  commencement, 
the  burning  ratio  for  the  whole  year  1902  showed  a perceptible 
decrease  as  compared  with  1901,  and  was  over  4 V2  points  below 
that  of  1899.  This  fact,  coupled  with  the  radical  advance  in 
prices,  reduced  the  loss  ratio  to  52J/2  and  caused  1902  to  rank 
as  one  of  the  best  years  in  the  history  of  the  business. 


YALE  INSURANCE  LECTURES. 


I39 


The  arbitrary  advance  above  mentioned  continued  until  1903, 
with  the  result  that  the  average  rate  advanced  in  that  year 
somewhat  above  the  high  mark  of  1902,  while  the  burning  ratio 
again  receded.  It  resulted  that  1903  closed  with  an  average 
loss  ratio  of  48.6  per  cent.,  the  lowest  ever  recorded,  and 
which  caused  an  abnormal  profit,  so  large  as  to  make  reduc- 
tions in  the  average  rate  an  absolute  necessity.  In  fact,  the 
closing  months  of  1903  saw  this  reduction  well  under  way  and 
it  was  in  full  progress  when  the  great  Baltimore  conflagration 
came  to  stay  it. 

As  to  the  wisdom  or  necessity  for  the  great  advance  in 
rates  in  1902  there  is  much  room  for  argument.  Some  of  those 
who  favored  it  then  afterwards  came  to  consider  it  a mistake, 
and  the  facts  expressed  in  our  chart  would  not  seem  to  demon- 
strate a valid  reason  for  it.  On  the  other  hand,  it  must,  in 
fairness,  be  said  that  the  high  rates  which  it  produced  made 
possible  the  accumulation,  in  the  treasuries  of  companies,  of 
funds  which  in  many  cases  materially  assisted  them  to  survive 
the  shock  of  the  conflagrations  in  Baltimore,  Rochester,  and 
Toronto  during  the  past  four  months,  and  the  same  high  rates 
are  even  now  effective  in  lessening  to  some  extent  the  demands 
of  those  who  believe  that  a further  radical  advance  in  prices 
has  been  made  necessary  by  these  conflagrations. 

We  have  already  discussed  most  of  the  printed  conditions 
of  the  Standard  Policy  in  one  of  the  earlier  lectures.  Those 
paragraphs  which  had  particular  reference  to  loss  settlements, 
however,  were  then  passed  over  and  will  be  briefly  consid- 
ered now. 

Referring  to  the  Standard  Policy,  the  first  six  lines  state  in 
a general  and  preliminary  way — 

First  (lines  1-2),  the  extent  of  the  liability  assumed  by  the 
company.  This  was  discussed  in  the  earlier  lecture. 

Second  (lines  2-3),  the  manner  in  which  the  loss  or  damage 
shall  be  ascertained. 


140 


YALE  INSURANCE  LECTURES. 


Third  (lines  3-4),  the  date  when  proved  claims  shall  become 
due.  And, 

Fourth  (lines  4-5-6),  the  options  to  which  the  company  is 
entitled;  (a)  to  pay  to  the  assured  the  duly  ascertained 
value  of  the  property  damaged,  thereby  acquiring  ownership 
of  it;  or,  ( b ) to  repair,  rebuild,  or  replace  the  property 
destroyed  or  damaged  with  other  of  like  kind  and  quality 
after  the  loss  or  damage  has  been  duly  proved.  But  the 
assured  is  not  permitted  to  abandon  his  property  to  the  com- 
pany except  at  their  option. 

The  second  and  third  provisions  just  mentioned  are  more 
fully  elaborated  in  later  paragraphs  and  will  be  touched  upon 
when  those  paragraphs  are  discussed. 

The  fourth  provision  is  intended  for  the  protection  of  com- 
panies. It  enables  them  sometimes  to  defeat  attempts  to 
collect  exorbitant  claims  for  damages  or  to  replace  at  actual 
cost  a building  or  other  property  where  an  excessive  amount  is 
claimed. 

The  first  option  is  often  useful  in  cases  where  an  excessive 
damage  is  claimed  on  articles  whose  value  has  been  fixed  dur- 
ing the  settlement.  For  instance : if  the  assured  and  the 
company  have  agreed  that  the  original  or  sound  value  of  a 
damaged  stock  was  $10,000,  but  cannot  agree  as  to  the 
amount  of  damage  done  by  fire,  water  or  smoke,  it  is  of 
course  perfectly  fair  for  the  company  to  pay  to  the  assured  the 
agreed  value,  namely  $10,000,  and  then  to  dispose  of  the 
stock  as  best  it  can.  Very  often  by  this  means  controversy  is 
avoided  and  the  claimant  satisfied  beyond  cavil,  while  the 
company  escapes  with  the  loss  of  a much  smaller  sum  than 
the  claimant  would  have  been  satisfied  to  accept  without  dis- 
pute. Where  this  course  is  followed  the  damaged  articles  are 
usually  cleaned,  repaired,  and  put  into  the  best  possible  con- 
dition and  then  sold.  This  process  is  called  wrecking  and 


YALE  INSURANCE  LECTURES.  141 

has  grown  to  be  a business  by  itself.  A number  of  insurance 
companies  have  organized  a company  to  do  such  work  and 
there  are  also  private  concerns  who  conduct  renovating  estab- 
lishments, where  damaged  goods  and  wares  of  every  descrip- 
tion may  be  cleansed,  laundered,  polished,  repaired,  dyed,  or 
put  through  any  other  process  that  will  make  them  salable, 
and  the  salvages  thus  made  are  frequently  surprisingly  large. 

The  second  option — that  which  gives  the  company  the 
privilege  of  replacing — is  availed  of  by  companies  in  extreme 
cases  only.  Insurance  companies  are  not  traders  or  con- 
tractors. They  have  no  special  machinery  or  opportunities 
for  advantageous  buying;  in  fact,  are  likely  to  be  unable  to 
purchase  at  as  favorable  terms  as  the  assured. 

Nor  if  a building  is  to  be  repaired  or  rebuilt  can  the  work 
be  economically  supervised  and  watched  by  an  insurance  com- 
pany, especially  if,  as  is  likely  to  be  the  case,  the  location  is 
at  a distance  from  the  head  office  of  the  company. 

Moreover,  the  requirement  that  the  company  shall  furnish 
articles  of  like  kind  and  quality  involves  certain  risks,  for  it 
may  be  necessary  to  prove  that  this  condition  has  been  satis- 
fied. 

A noteworthy  case  of  this  kind  occurred  not  many  years 
since  in  Tennessee,  where  the  owner  of  a hotel  which  had  been 
destroyed  succeeded  in  establishing  what  seemed  to  the  com- 
panies interested  an  excessively  high  valuation, — so  high,  in 
fact,  that  it  was  thought  a new  building  like  the  old  one  could 
be  erected  for  much  less  than  the  amount  claimed.  Accord- 
ingly, the  companies  elected  to  rebuild  instead  of  paying  the 
loss,  and  having  called  upon  the  assured  for  plans  and  speci- 
fications, proceeded  to  make  contracts  for  the  restoration  of 
the  building  exactly  as  it  was  before  the  fire.  It  was  practi- 
cally impossible  for  the  companies  to  watch  every  detail  of  the 
construction,  but  an  easy  matter  for  the  assured,  who  lived 


142 


YALE  INSURANCE  LECTURES. 


where  the  building  was  located.  When  the  building  was 
finished  the  companies  tendered  it  to  the  assured  in  lieu  of 
payment,  but  he  was  able  to  prove — or  at  least  did  prove  to 
the  satisfaction  of  a jury — that  the  building  was  not  of  exactly 
the  same  kind  and  quality  as  the  old  one  which  had  been 
destroyed.  Therefore  he  claimed  the  full  cash  payment  and 
the  court  decided  that  the  companies  were  liable.  As  a 
result,  the  assured  received  the  full  amount  of  his  claim, 
with  interest,  and  since  the  new  building  was  on  his  land,  he 
also  acquired  that.  This  was  a very  costly  experience  for 
the  companies  and  will  suffice  to  explain  why  the  option  to 
replace  is  seldom  used. 

Passing  now  to  the  more  detailed  conditions  of  the  policy, 
which  refers  to  loss  settlements,  we  begin  at  line  No.  67. 

The  paragraph  embraced  in  lines  Nos.  67-80  inclusive,  states 
very  clearly  the  duties  of  the  assured  if  fire  occurs  and  pro- 
vides first, — that  he  shall  give  the  company  due  notice  of  its 
occurrence. 

Second, — that  he  shall  protect  the  property  saved,  whether 
damaged  or  undamaged, — at  the  same  time  making  an  inven- 
tory of  the  same,  with  complete  statement  of  quantities,  values, 
and  amount  of  claimed  damages.  And, 

Third, — that  he  shall,  within  sixty  days,  render  a complete 
statement,  under  oath,  giving  in  detail  a full  account  of  the 
fire  and  a description  of  the  property  involved,  and  of  the 
facts  concerning  its  ownership,  in  accordance  with  the  list 
to  be  found  in  the  paragraph  under  discussion. 

The  next  five  lines,  Nos.  81-85  inclusive,  give  to  the  com- 
pany the  opportunity  to  inspect  all  that  remains  of  the 
property,  to  cross-examine  the  assured  as  to  claims  and  state- 
ments made  and  to  verify  same  by  an  examination  of  the 
books  and  records  of  the  assured. 

It  will  be  seen  that  these  provisions  and  requirements 
(embraced  in  lines  Nos.  67-85  just  mentioned)  contemplate 


YALE  INSURANCE  LECTURES. 


M3 


the  making  of  a complete  proof  or  statement  by  the  claimant, 
which  the  company  may  thereupon  verify,  test,  and  pass  upon, 
and,  if  the  proofs  set  forth  a claim  which  is  satisfactory  and 
correct  under  the  terms  and  scope  of  the  contract,  it  is  to  be 
presumed  the  company  will,  at  the  proper  time,  pay  it. 

In  common  practice,  loss  claims  are  settled  in  a somewhat 
different  fashion.  As  soon  as  practicable  after  a notice  of 
loss  has  been  received  and  without  waiting  for  detailed  state- 
ments, a representative  of  the  insurance  company — called  an 
adjuster — goes  to  the  scene  of  the  fire  for  the  purpose  of 
investigating  and  settling,  or  adjusting,  the  claim. 

The  adjuster's  work  is  difficult  and  often  technical.  Since 
he  is  called  upon  to  settle  claims  arising  from  loss  or  damage 
to  buildings,  an  expert  adjuster  must  be  competent  to  super- 
vise and  criticise  plans  and  estimates.  In  order  to  adjust 
claims  for  mercantile  losses  he  must  be  informed,  or  be  able 
to  acquire  information,  as  to  the  value  of  commodities  of  all 
kinds,  and  should  be  well  versed  in  the  methods  and  customs 
of  the  various  branches  of  commerce  and  manufacture. 

Furthermore,  he  must  be  a good  accountant,  so  that  he  may 
be  able  to  test  the  accuracy  of  the  amounts  of  goods  on  hand, 
profits,  etc.,  etc. 

Finally,  and  perhaps  most  important,  he  should  possess 
the  ability  and  personal  qualifications  necessary  to  carry  on 
with  as  little  friction  as  may  be,  negotiations  concerning  all 
these  matters  with  claimants  to  the  end  that  claims  may  be 
amicably  and  justly  settled  without  dispute  or  litigation,  which 
the  better  class  of  companies  dread  and  will  concede  much  to 
avoid.  Since  claimants  usually  have  an  exaggerated  idea  as 
to  the  amount  of  loss  they  have  suffered,  and  are  ignorant 
for  the  most  part  of  the  nature  of  the  contract  under  which 
their  claim  has  arisen,  this  is  no  easy  task. 

In  addition  to  these  requirements,  a good  adjuster  often  has 
need  of  that  alertness  of  perception  and  ingenuity  which  will 


144 


YALE  INSURANCE  LECTURES. 


enable  him  to  detect  and  defeat  the  well  laid  plans  of  those 
too  frequent  claimants  who  endeavor,  by  one  means  and 
another,  to  fraudulently  collect  claims  to  which  they  are  not 
entitled  or  which  are  dishonestly  excessive. 

The  first  duty  of  the  adjuster,  after  requiring  the  assured 
to  take  proper  care  of  any  insured  property  not  totally 
destroyed,  is  to  determine  whether  the  company  is  actually 
liable  for  the  loss  or  damage,  or  not.  That  is,  he  must  find, 
through  investigations  of  various  sorts,  whether  the  contract 
has  been  made  void  by  any  of  the  circumstances,  acts,  or  con- 
ditions named  in  lines  Nos.  7-30  inclusive.  This  will  include 
an  attempt  to  discover  the  cause  which  originated  the  fire. 
In  those  few  cases  where  there  is  reason  to  suspect  that  the 
policy  has  been  rendered  void  by  fraud  or  some  other  cause, 
the  adjuster  must  exercise  a wise  discretion  as  to  his  subse- 
quent actions.  If  there  be  clear  evidence  of  deliberate  fraud, 
he  will  secure  proofs  of  it  and  take  no  further  action.  If, 
later,  the  assured  attempts  to  present  proofs  or  to  collect  his 
claim,  the  company  will  deny  liability  and  contest  the  claim, 
if  need  be,  in  court;  or,  the  claimant,  knowing  his  case  to  be 
well-nigh  hopeless,  will  consent  to  withdraw  his  claim  for 
some  nominal  sum.  Where  there  are  strong  indications  of 
fraud,  but  not  sufficient  evidence  to  enable  a flat  denial  of 
liability  to  be  made,  a temporizing  policy  is  often  pursued. 
The  claim  is  investigated,  the  assured  cross-examined  and 
questioned,  his  statements  are  verified  or  disproved  by  careful 
investigation,  and  if,  during  the  protracted  negotiations,  he  is 
discovered  to  be  making  false  statements,  he  will  very  likely 
put  himself  in  a position  where  he  must  accept  a partial  pay- 
ment or  compromise  settlement,  or  he  will  perhaps  defeat 
himself  altogether.  As  stated  above,  however,  the  vast 
majority  of  claims  are  found  to  be  honest  and  the  sole  duty 
of  the  adjuster  in  such  cases  is  to  ascertain  the  extent  to 
which  the  company  is  liable. 


YALE  INSURANCE  LECTURES. 


x45 


Trifling  losses  demand  little  time  or  attention.  The  cost 
of  petty  repairs  or  the  value  of  an  insignificant  amount  of 
merchandise  or  other  property,  which  has  been  destroyed,  can 
almost  invariably  be  quickly  agreed  upon.  The  small  amount 
involved  will  not  warrant  either  party  in  delaying  a settle- 
ment. 

In  the  case  of  larger  losses,  the  first  step  towards  deter- 
mining the  extent  to  which  the  company  is  liable  is  to 
endeavor  to  agree  with  the  assured  as  to  the  fair  cash  value  of 
the  insured  property  immediately  preceding  the  fire.  In 
determining  this  value — usually  called  the  sound  value — the 
question  of  depreciation, — referred  to  at  some  length  in  a 
previous  lecture — must  be  gone  into. 

To  determine  the  fair  cash  value  of  a building  which  has  been 
destroyed  or  very  badly  damaged,  it  is  usually  necessary  to 
have  plans  or  descriptions  furnished  by  the  owner.  By  means 
of  these  it  is  not  difficult  to  determine,  by  estimates  obtained 
from  builders  or  otherwise,  what  it  would  cost  to  replace  the 
building.  This  amount,  when  subjected  to  a proper  depreci- 
ation, represents,  in  ordinary  cases,  the  value  in  question. 

There  are,  however,  in  every  community,  buildings  which, 
on  account  of  unfortunate  location,  bad  design,  or  some  other 
reason,  have  practically  no  real  cash  value.  Insurance  com- 
panies do  not  knowingly  insure  such  buildings;  but  where, 
by  reason  of  the  carelessness  of  examiners  or  inspectors,  or 
through  the  ignorance,  or  worse,  of  a local  agent,  such  build- 
ings are  insured,  they  are  very  apt  to  burn,  and  the  loss 
settlements  necessary  in  such  cases  almost  invariably  lead  to 
controversy  and  must  be  settled — not  by  any  well-defined  rule 
but  by  some  compromise,  probably  unsatisfactory  to  both 
parties. 

To  fix  the  value  of  personal  property,  as,  for  instance,  a 
stock  of  merchandise,  is  a more  difficult  matter.  The  basis 


io 


146 


YALE  INSURANCE  LECTURES. 


or  starting  point  in  the  process  of  adjusting  every  loss  on 
merchandise  where  a large  portion  of  the  value  has  been 
destroyed  should  be  an  inventory,  which  should  furnish  a 
clear  and  accurate  statement  of  the  quantities  and  values,  with 
proper  allowance  for  depreciation,  of  the  insured  property  on 
hand  at  some  date  within  a year  previous  to  the  fire.  Since 
most  merchants  and  manufacturers  take  annual  inventories, 
this  basis  can  usually  be  had,  though  often  a careful  verifica- 
tion of  it  is  necessary. 

To  find  the  value  at  the  time  of  the  fire  there  is  added  to 
the  amount  shown  by  the  inventory  the  subsequent  purchases 
as  shown  by  the  books  and  vouchers  of  the  assured,  and  from 
the  sum  thus  found  are  deducted  the  sales,  less  profits  on 
goods  sold. 

The  question  of  profit  is  often  difficult  to  determine,  as 
many  factors  affect  it  and  few  merchants  and  manufacturers 
keep  their  records  in  such  a way  as  to  accurately  measure  this 
item. 

The  rate  of  profit  plays  a very  important  part  in  the  settle- 
ment of  losses  on  merchandise,  for  the  larger  the  profit  the 
greater  the  loss,  as  will  appear  from  the  above  statement. 

Where  a policy  covers  staples  in  large  quantities  (usually 
in  warehouses  or  elevators),  such  as  cotton,  tobacco,  grain, 
flour,  etc.,  instead  of  determining  value  by  means  of  an 
inventory,  it  is  determined  by  quantities  and  the  market  price, 
which  fluctuates  from  day  to  day  and  which  may  be  very 
different  at  the  time  of  the  fire  from  the  original  cost  to  the 
owner. 

When  the  value  has  been  fixed,  an  attempt  is  made  to  agree 
upon  the  amount  of  loss  or  damage.  If  the  property  has  been 
totally  destroyed,  this  is,  of  course,  not  necessary.  Where  the 
property  insured  is  a building  and  is  but  partially  destroyed, 
the  amount  of  damage  is  ascertained  by  determining  the  cost 


YALE  INSURANCE  LECTURES. 


147 


of  the  repairs  necessary  to  fully  restore  the  building  to  its 
former  condition.  Where  merchandise  or  other  personal 
property  is  merely  damaged  or  partially  destroyed,  various 
methods  of  ascertaining  the  amount  of  damage  are  used.  If 
no  articles  are  totally  obliterated,  the  damaged  are  separated 
from  the  undamaged  and  the  amount  of  loss  on  each  damaged 
article  or  package  of  goods  is  agreed  upon.  Then  the  sum  of 
these  agreed  damages  makes  up  the  total  loss  which  has  been 
sustained  by  the  assured.  Where  any  considerable  portion  of 
a stock  of  merchandise  has  been  completely  obliterated,  how- 
ever, the  amount  of  loss  sustained  is  determined  by  sub- 
tracting from  the  already  ascertained  sound  value  immediately 
preceding  the  fire,  the  value  of  that  portion  of  the  stock  which 
is  saved,  making  due  allowance  for  any  damages  incurred. 

It  sometimes  happens  that  there  is  no  inventory,  either 
because  none  has  been  taken  or  because  it  has  been  destroyed 
in  the  fire.  Such  cases  often  test  the  ingenuity  of  the  adjuster. 
He  must  secure  from  the  assured  some  fairly  accurate  esti- 
mate of  the  value  of  the  merchandise  on  hand  before  the  fire. 
If  any  books  of  sales  or  of  cash  receipts  are  at  hand,  these  are 
searched  and  the  volume  of  his  business  and  sales  thus  estab- 
lished. He  is  also  usually  required  to  secure  duplicate 
invoices  and  bills  from  the  manufacturers  and  jobbers  from 
whom  his  stock  was  purchased.  Sometimes  his  daily  deposits 
and  withdrawals  from  his  banker  are  tabulated,  and,  finally, 
his  own  memory  is  searched,  as  well  as  those  of  his  employees. 
By  combining  all  these  methods,  some  approximation  of  the 
value  can  be  made,  even  if  the  entire  stock  on  hand  has  been 
destroyed,  but  such  cases  are  very  unsatisfactory — so  much 
so  that  most  companies  will  not  insure  merchants  who  do  not 
keep  regular  books  of  account  and  take  annual  inventories. 

Having  now  determined  the  sound  value  and  the  actual 
loss  or  damage,  the  claim  is  adjusted  by  applying  the  con- 
ditions and  amount  of  the  policy  to  these  ascertained  item,s. 


148 


YALE  INSURANCE  LECTURES. 


The  assured  may  not  recover  more  than  the  sound  value. 
He  cannot  collect  more  than  his  actual  loss,  nor  more  than  its 
proper  proportion  under  any  one  policy.  Moreover,  if  the 
co-insurance  clause  forms  a part  of  the  contract  and  he  has 
failed  to  carry  enough  insurance  to  comply  with  it,  that  fact 
may  affect  the  amount  of  his  claim  against  the  company. 
(See  second  lecture.)  Nevertheless,  when  once  the  value 
and  the  actual  loss  are  ascertained,  the  amount  of  the  claim 
against  the  company  can  in  almost  every  case  be  determined 
by  a very  simple  mathematical  calculation.  This  being  done, 
the  adjuster  in  ordinary  cases  helps  the  assured  to  prepare 
his  proofs  and  forwards  them  to  the  company  for  approval 
and  payment,  or  he  may  pay  the  loss  on  the  spot. 

It  was  stated  above  that  when  once  the  value  and  amount 
of  loss  were  ascertained,  the  proper  amount  of  claim  could 
be  readily  ascertained  in  almost  every  case.  In  some  cases 
where  more  than  one  policy  is  affected  and  the  policies  differ 
in  scope  or  conditions,  it  is  very  difficult  to  determine  how 
great  a claim  should  be  made  under  each  policy.  For 
instance : 

Suppose  three  policies  to  be  in  existence  at  the  time  of 
fire  and  that  all  have  been  issued  to  the  same  merchant, 
who  carries  a general  miscellaneous  stock  of  merchandise, 
including  dry  goods,  groceries,  hardware,  boots  and  shoes, 
etc.,  etc.  Suppose  further  that  these  three  policies  cover  as 
follows : 

The  first — on  his  stock  of  general  merchandise  (which 
would  include  everything  kept  for  sale)  ; the  second — on  his 
stock  of  groceries  and  provisions  only ; while  the  third 
covers  his  stock  of  groceries  and  dry  goods.  In  such  cases, 
of  which  this  is  a very  simple  example,  even  if  the  values  and 
the  amount  of  loss  are  quickly  determined,  it  requires  some 
skill  and  often  protracted  negotiation  to  determine  just  how 


YALE  INSURANCE  LECTURES. 


149 


much  each  policy  shall  pay,  unless,  indeed,  the  destruction  of 
the  property  is  so  great  as  to  involve  beyond  a doubt  a total 
loss  to  all  policies.  This  situation  would  be  considerably 
complicated  if  one  of  the  policies  contained  a co-insurance 
clause  and  the  other  did  not.  In  any  event,  the  company  with 
the  broadest  or  most  inclusive  form  would  be  at  a serious  dis- 
advantage as  compared  with  the  other  two.  Such  policies 
are  called  non-concurrent  and  are  not  knowingly  written  or 
permitted  by  insurance  companies;  but  they  are  sometimes 
found  to  exist  where  several  different  agents  have  been  inter- 
ested in  a risk  and  have  not  been  careful  to  examine  all  the 
policies  in  force  upon  it,  for  it  is  a fixed  principle  that  policies 
intended  to  cover  the  same  property  shall  be  identical  in 
language. 

Thus  far  we  have  assumed  that  the  adjuster  and  the 
assured  have  agreed  without  much  difficulty,  though  it  must 
be  admitted  that  the  problems  involved  in  fixing  values, 
damages,  and  profits,  and  in  defining  the  application  or  scope 
of  the  policy,  afford  many  opportunities  for  honest  differ- 
ences of  opinion.  It  argues  well,  therefore,  for  the  ability, 
tact,  and  fairness  of  adjusters  as  a class,  that  the  number  of 
claims  which  are  not  settled  by  agreement  with  the  claimant 
is,  comparatively  speaking,  very  small. 

When,  however,  an  agreement  as  to  value  and  amount  of 
loss  cannot  be  reached,  lines  Nos.  86-91  of  the  policy  provide 
that  these  questions  shall  be  determined  by  arbitration.  The 
case  is  then  put  into  the  hands  of  two  arbitrators, — one 
chosen  by  the  company  and  the  other  by  the  claimant,  and 
the  arbitrators  themselves  choose  an  umpire.  A decision  by 
any  two  of  the  three  so  selected  is  final.  This  is,  theoretically 
and  practically,  an  eminently  fair  way  of  settling  such  dis- 
putes if  truly  disinterested  and  competent  arbitrators  are 
selected.  It  sometimes  happens  that  improper  selections  are 


150  YALE  INSURANCE  LECTURES. 

made  and  the  case  is  then  likely  to  lead  to  much  bitterness  and 
feeling  and,  not  infrequently,  to  litigation. 

It  is  to  be  noted  that  the  arbitrators  may  fix  the  value  and 
ascertain  the  amount  of  loss.  They  are  not  permitted,  how- 
ever, to  make  any  decision  as  to  the  liability  of  the  company 
or  as  to  the  extent  to  which  the  policy  shall  apply.  Where 
the  assured  and  the  adjuster  cannot  agree  upon  those  points, 
a recourse  to  litigation  is  the  only  method  of  reaching  a settle- 
ment. Either  the  company  or  the  claimant  may  demand  an 
arbitration  at  any  time.  Accordingly,  when  the  case  bids 
fair  to  be  complicated  or  involves  unusual  problems,  as,  for 
instance,  the  determination  of  the  value  of  or  damage  to  large 
quantities  of  expensive  machinery  or  the  ascertainment  of  the 
damage  of  partially  wrecked  fire-proof  office  buildings,  as 
recently  in  Baltimore,  it  is  usual,  at  the  outset,  to  adopt  the 
method  of  arbitration.  Usually  in  such  cases  neither  side  is 
competent  to  fix  the  loss  and  expert  builders  or  machinists 
are  employed  as  arbitrators. 

Lines  Nos.  92-93  provide  that  the  attempt  to  fix  the  amount 
of  loss  by  appraisal  and  the  other  steps  taken  by  the  company 
to  investigate  the  loss  shall  not  be  held  to  prevent  it  from 
denying  liability  later  if  circumstances  warrant  such  action,  or 
in  any  way  bar  it  from  the  rights  which  the  policy  conditions 
confer. 

Lines  Nos.  94-95  make  the  loss  payable  sixty  days  after 
it  has  been  adjusted  or  the  arbitration  decided,  and  proper 
proofs  have  been  filed  with  the  company.  This  interval 
gives  the  company  time  to  verify  the  proofs  and  to  make 
any  further  investigation  necessary  to  confirm  the  honesty 
of  the  claim.  It  also,  in  the  case  of  conflagrations,  allows 
time  for  the  accumulation  of  funds  with  which  to  make 
payments.'  Companies  usually  elect  to  pay  small  losses  as 
soon  as  they  are  settled;  and  usually,  too,  they  are  glad  to 


YALE  INSURANCE  LECTURES.  151 

promptly  pay  large  ones  if  the  claimant  will  consent  to  the 
regular  rate  of  discount  for  prepayment. 

In  the  second  lecture  it  was  stated  that  probably  not  over 
one-half  of  one  per  cent,  of  the  total  number  of  claims  result 
in  litigation.  This  is  an  extremely  remarkable  fact  when  the 
opportunities  for  conflict  which  present  themselves  in  loss 
settlements  are  considered.  The  truth  is,  however,  that 
adjustments  are  not  often  difficult  to  accomplish  when  there 
exists  an  honest  desire  on  both  sides  to  fairly  and  equitably 
measure  the  extent  of  the  actual  loss  or  damage  according 
to  the  conditions  of  the  policy.  This  is  the  usual  condition, 
though  sometimes  men  ordinarily  honest  cannot  resist  the 
temptation  offered  by  the  opportunity  to  make  a profit  out  of 
a fire;  and  sometimes,  too,  though  by  no  means  often,  it  must 
be  admitted,  adjusters,  impelled  by  a desire  to  make  a repu- 
tation for  successful  settlements  or  because  they  desire  to  cut 
down  the  loss  payments  of  their  company  as  much  as  possible, 
are  loth  to  deal  out  to  the  assured  the  full  measure  of  com- 
pensation to  which  he  is  entitled.  Companies  of  good 
standing  do  not  encourage  or  knowingly  permit  injustice  to 
claimants.  The  good-will  of  customers  is  a valuable  asset 
and  no  company  can  afford  to  acquire  a reputation  for  unfair 
settlements. 

On  the  other  hand,  all  losses  should  be  settled  so  that  the 
assured  may  receive  as  near  as  may  be  the  amount  to  which 
he  is  entitled  and  no  more.  Lax  methods  and  a reputation 
for  indiscriminate  liberality  are  likely  to  make  a company  a 
target  for  numerous  fraudulent  claims  and  bring  to  it  a class 
of  patrons  whose  deliberate  purpose  when  securing  insurance 
is  fraud.  Furthermore,  such  methods  violate  that  cardinal 
principle  of  insurance — “No  profit  to  the  assured  from  a fire,” 
and  by  so  doing  encourage  carelessness,  the  increase  of  the 
fire  waste,  and  the  growth  of  incendiarism. 


*52 


YALE  INSURANCE  LECTURES. 


Table  given  below  shows  the  Burning  Ratios,  Loss  Ratios, 
and  Average  Rates  of  the  different  States  of  the  Union  for 
a period  of  twenty-three  years,  ending  December  31,  1902: 


State. 

Burning  Ratio. 

Loss  Ratio. 

Avg.  Rate. 

Alabama  

008l 

52.9 

.0153 

Arizona  

0194 

79-9 

.0243 

Arkansas  

61.6 

.0193 

California 

43-8 

.0155 

Colorado  

44.2 

.0162 

Connecticut  

48.7 

.OO94 

Delaware 

59-7 

.0080 

District  of  Columbia 

0023 

39-6 

.0059 

Florida  

90.1 

.0195 

Georgia  

0074 

57-6 

.0128 

Idaho  

57-9 

.0244 

Illinois  

0057 

49.6 

.0115 

Indiana  

56.9 

.0120 

Indian  Territory 

Ol66 

75-8 

.0220 

Iowa  

45-2 

.0151 

Kansas  

0067 

50.6 

'01 33 

Kentucky  

61.6 

.0131 

Louisiana  

0059 

Si-7 

.0113 

Maine  

0083 

60.3 

.0137 

Maryland  

56.2 

.0076 

Massachusetts  

0057 

56.5 

.0100 

Michigan  

54-9 

.0139 

Minnesota  

008l 

57-4 

.0141 

Mississippi  

52.1 

.0188 

Missouri  

0077 

64-3 

.0119 

Montana  

34-8 

.0240 

Nebraska 

43-5 

.0151 

Nevada  

37-3 

.0247 

New  Hampshire 

0065 

52.0 

.0124 

New  Jersey 

0045 

56.3 

.0081 

New  Mexico 

54-3 

.0196 

New  York 

58-7 

.0062 

North  Carolina 

54-9 

.0148 

North  Dakota 

0154 

77-4 

.0200 

YALE  INSURANCE  LECTURES.  1 53 


State. 

Burning  Ratio. 

Loss  Ratio. 

Avg.  Rate. 

Ohio  

59-8 

.0110 

Oklahoma  

OO54 

30.8 

.0174 

Oregon  

43-2 

.0201 

Pennsylvania  

006l 

57-2 

.0107 

Rhode  Island 

OO48 

50.5 

.0095 

South  Carolina  . . . 

0072 

54-3 

.0132 

South  Dakota  .... 

0090 

48.5 

.0185 

Tennessee  

66.4 

.0150 

Texas  

62.4 

.0163 

Utah  

0075 

43-i 

.0173 

Vermont 

65-9 

.0138 

Virginia  

59-8 

•0135 

Washington 

OI33 

60.5 

.0220 

West  Virginia  . . . . , 

56-5 

.0126 

Wisconsin  

55-6 

.0142 

Wyoming  

35-8 

.OI89 

Below  is  given  a simple  example  of  statement  such  as  is 
ordinarily  made  up,  to  show  the  method  by  which  a loss  is 
settled,  and  should  be  studied  in  connection  with  the  remarks 
upon  Adjustments  in  the  last  lecture. 


STATEMENT  OF  LOSS. 

Value. 

Last  inventory  $11,000 

Deduct  agreed  depreciation 1,000 

Net  value  date  of  inventory $10,000 

Add  purchases  since  inventory,  including  freight 4,000 


$14,000 

Deduct  sales  since  inventory $5, 000 

Less  agreed  profits  1,000  4,000 


Sound  value  $10,000 


I54 


YALE  INSURANCE  LECTURES. 


Loss. 

Property  saved  undamaged  $3,000 

Add  property  saved  damaged $3,ooo 

Less  agreed  damage  to  same  as  per  itemized 

schedule  1,000  2,000 


Total  salvage $5, 000 

Total  loss  to  assured 5,000 


$10,000 

Insurance  carried  $6,000,  with  80%  co-insurance  clause, 
which,  with  a sound  value  of  $10,000,  requires 
$8,000  insurance  to  be  carried. 

Therefore  each  $1,000  of  insurance  will  have  to  pay 


% of  $5,000  (the  total  loss),  or  $625. 

$6,000  insurance  pays  $3,750 

Assured  contributes  $2,000  insurance,  which  pays 1,250 


Total  $5,ooo 


Fire  Insurance  Engineering 


METHODS  OF  BUILDING  CONSTRUCTION 
FOR  THE  PREVENTION  OF  FIRE  LOSSES 

BY  H.  C.  HENLEY 

Much  of  the  enormous  fire  loss  in  these  United  States  can 
be  traced  directly  to  faulty  construction  of  buildings;  open 
elevator  shafts,  stairways,  light  shafts,  well  holes  and  other 
communicating  openings  through  floors,  creating  natural  flues, 
through  which  fire,  once  started,  travels  with  lightning  rapidity 
throughout  the  building.  The  arrangement  of  wooden  sheath- 
ing on  walls,  metal  and  wood  ceilings,  the  construction  of 
attics,  creating  concealed  spaces  wherein  fire,  obtaining  head- 
way, is  inaccessible  to  streams  of  water.  Mercantile  build- 
ings with  stone  or  iron  fronts,  backed  with  wood  lath  and 
plaster,  leaving  continuous  open  space  through  full  height  of 
wall  from  cellar  to  attic,  defective  construction  of  flues,  defec- 
tive wood  framing  around  flues — all  tend  to  increase  the  fire 
loss. 

Within  the  past  few  years,  insurance  inspection  bureaus 
have  given  the  matter  of  the  construction  of  buildings, 
towards  making  them  more  fire-retardent,  much  attention,  and 
in  attempting  the  correction  of  the  above  defects,  the  slow- 
burning  building  was  designed,  and  most  of  the  buildings 
which  are  erected  at  the  present  time,  especially  those  intended 
to  contain  large  and  valuable  stocks  or  to  be  used  as  large 
manufacturing  plants,  are  either  of  slow-burning  construc- 
tion or  of  the  so-called  fireproof  type. 


156  YALE  INSURANCE  LECTURES. 

I have  been  requested  to  describe  the  Standard  Slow-Burn- 
ing Building.  The  Standard  Slow-Burning  Building  differs 
from  the  building  of  joist  construction  in  the  following  par- 
ticulars : 

The  elevators,  stairs,  belts,  etc.,  are  enclosed  in  brick  shafts — 
walls  of  shaft  extending  three  feet  above  roof  and  shaft  com- 
municating with  each  floor  through  openings  provided  with 
standard  automatic  fire  doors.  Floors  are  solid,  without  open- 
ings, constructed  of  heavy  tongue  and  grooved  plank  with  top 
floor  of  matched  boards,  with  two  thicknesses  of  asbestos 
paper  between  the  two.  The  floors  are  laid  directly  upon  the 
beams  and  girders  and  the  bottom  of  the  beams  and  girders 
are  left  open,  preventing  any  concealed  spaces  in  which  dirt 
can  accumulate.  In  this  construction,  there  is  less  surface 
exposed  to  flame,  and,  the  beams  being  heavier  than  joist 
in  joist  construction,  the  floor  is  kept  intact  a longer  period 
of  time,  and  there  is  a chance  to  hold  fires  that  occur  upon 
the  floor  in  which  they  originate. 

Walls  should  preferably  be  built  of  hard-burned  brick  laid 
in  cement  mortar.  Stone  disintegrates  quickly  and  granite 
is  particularly  bad  under  heat  and  will  not  stand  fire  and 
water.  Steel  or  iron  framework  of  walls,  unless  protected  by 
brick  or  terra  cotta,  loses  its  strength  rapidly  under  heat. 

Ornamental  fronts  and  fronts  having  a large  amount  of 
glass  are  subject  to  severe  loss  from  exposing  fires. 

Good  brick  clay  does  not  contain  more  than  6 per  cent,  of 
fluxing  impurities  and  when  hard  burned  affords  the  best 
material  for  the  construction  of  walls.  The  small  difference 
in  the  cost  between  brick  made  of  good  clay,  hard  burned,  and 
brick  made  of  inferior  material  is  sometimes  the  cause  of 
the  cheaper  brick  being  used. 

In  a seven-story  fireproof  hotel  structure,  being  erected  at 
the  present  time,  I noticed  the  quality  of  brick  which  was 
being  used  in  the  construction  of  the  walls,  and  an  analysis 
of  the  brick  showed : 


YALE  INSURANCE  LECTURES. 


*57 


Loss  by  ignition 

Silica  

(t 

Alumina  

1441 

tt 

Oxide  of  iron 

5-82 

tt 

Lime,  CaO  

tt 

Magnesia,  MgO 

5-88 

ft 

Alkalies  

543 

tt 

100.00 

Total  fluxing  impurities 

27.29  per  cent. 

The  brick  had  weak  bond,  crushing  at  2,610  lbs.  per  sq.  in. 
It  was  poorly  burned,  as  it  was  evident  from  its  composition 
that  it  would  not  stand  much  over  a low  kiln  heat  without 
melting  and  its  use  as  building  material  would  be  dangerous, 
since  it  would  be  destroyed  at  a temperature  far  below  that 
common  in  burning  buildings. 

The  strength  of  the  wall  depends  upon  the  mortar  used  and 
the  best  mortar  is  composed  of  Portland  cement  and  clean, 
sharp  sand,  mixed  while  dry  in  the  proportion  of  not  less  than 
one  of  cerr^ent  to,  three  of  sand,  thoroughly  mixed  to  a 
uniform  color  and  sufficient  water  added  to  make  a 
smooth  mortar.  The  mortar  should  not  be  allowed  to 
set  or  become  hard  before  used.  Mortar  made  and  used  as 
stated  above  will  bond  well  and  is  very  adhesive.  Poor  mor- 
tar is  as  bad  as  poor  bricks  and  a wall  made  with  poor 
mortar  will  be  merely  a pile  of  bricks  with  no  bond  after  a 
few  months  weathering.  Brick  should  be  thoroughly  wet  be- 
fore being  laid,  preventing  the  absorption  of  the  moisture  from 
the  mortar  and  causing  it  to  cling  to  the  brick.  The  thickness 
of  walls  should  not  be  less  than  the  following:  The  top 
story  13  inches ; the  next  two  below  18  inches ; the  next  two 
below  22  inches;  the  next  two  below  26  inches;  the  next 
two  below  30  inches. 


158  YALE  INSURANCE  LECTURES. 

To  prevent  the  weakening  of  the  walls  by  inserting  the  ends 
of  beams  into  walls  they  should  be  corbeled  out  on  each 
floor  to  form  a four-inch  ledge  for  the  floor  planks  to  rest 
upon,  unless  a four-inch  ledge  is  made  by  the  walls  receding 
to  smaller  dimensions.  Changes  in  the  thickness  of  walls 
should  be  made  on  a line  with  top  floor  beams.  No  wood 
planking,  wood  plates  or  wood  lintels  should  be  built  in  walls. 

In  some  instances,  builders  prefer  to  build  wood  plates  in 
wall  extending  the  full  length  at  each  floor  level,  for  the  pur- 
pose of  supporting  the  floors.  The  wood  plates  enable  them 
to  lay  the  floor  quickly  and  the  floor  requires  no  leveling. 
Introduction  of  these  wood  plates  in  the  wall  weaken  it  by 
reducing  the  thickness  at  that  point  and  the  shrinkage  of  the 
wood  plates  renders  the  floor  at  that  point  leaky. 

Party  or  Division  Walls.  As  these  walls,  in  the  event 
of  fire,  are  apt  to  be  subjected  to  severe  heat  and  shock  from 
portions  of  buildings  which  they  separate  falling,  it  is  neces- 
sary that  they  be  built  heavier  and  stronger  than  called  for  in 
exterior  wall  construction,  and  all  party  or  division  walls  and 
bearing  walls  over  100  feet  in  length  should  be  four  inches 
thicker  than  the  thickness  called  for  in  exterior  walls,  and  the 
walls  should  be  carried  three  feet  above  the  roof  and  be  coped 
with  stone,  cast  iron  or  tile  and  corbeled  sufficiently  to  extend 
past  the  cornice  line. 

Flues.  Flues  for  heating  stoves  should  not  be  less  than 
eight  inches  thick  or,  if  lined  with  cast  iron  flue  lining,  the 
thickness  may  be  reduced  to  four  inches.  Base  of  flue  should 
not  be  supported  upon  any  floor,  but  should  be  built  from  the 
earth.  Flues  for  boilers,  furnaces,  etc.,  which  heat  the  flue 
to  a high  temperature  should  be  provided  with  double  walls 
of  a combined  thickness  of  thirteen  inches,  leaving  an  air 
space  of  two  inches  in  thickness  for  a distance  of  at  least 
twenty-five  feet  above  the  smoke  inlet.  This  inner  wall  should 


YALE  INSURANCE  LECTURES. 


T59 


be  constructed  of  fire  brick,  laid  in  fire  clay  mortar.  The 
area  of  the  flue  should  be  adequate  for  the  service  required. 
All  woodwork  should  be  trimmed  away  at  least  two  inches 
from  outside  wall  of  flue  and  the  space  thus  formed  between 
trimmers  and  wall  left  open  for  ventilation,  and  no  beam, 
girders  or  other  woodwork  should  enter  a wall  within  twelve 
inches  of  the  interior  of  any  flue. 

Columns , Beams  and  Girders.  In  buildings  of  this  type 
it  is  preferable  that  all  columns,  beams  and  girders  be  of  solid 
timber.  Unprotected  iron  and  steel  supports  are  very  unrelia- 
ble and  will  bend  and  twist  quickly  under  heat.  No  metal 
supports  should  be  used  unless  properly  fireproofed.  Stone  or 
granite  must  not  be  used  for  any  of  the  interior  supports. 
The  columns,  beams  and  girders  should  be  of  such  dimensions 
as  to  easily  bear  their  respective  strains  after  allowing  an 
inch  for  charring  on  all  sides.  No  timber,  however,  should  be 
less  than  eight-inch  dimension.  They  should  be  planed  smooth 
on  all  sides  which  may  be  exposed  to  action  of  fire.  Special 
precaution  should  be  taken  to  secure  ventilation  around  ends 
of  timbers  where  entering  walls,  to  prevent  dry  rot.  Beams 
and  girders  should  rest  upon  cast  iron  wall  boxes  built  in  the 
wall.  All  beams  and  girders  should  be  beveled  at  top,  prop- 
erly anchored  to  wall,  but  in  such  a manner  as  to  be  self-releas- 
ing, so  that,  in  the  event  of  a serious  fire,  their  falling  will  not 
pry  down  the  wall.  The  most  simple  arrangement  is  notching 
the  under  side  of  beams  near  the  end  and  fitting  the  notch 
over  a lug  arranged  upon  the  wall  box.  Columns  should  be 
continuous  throughout  all  stories  and  ends  connected  with 
cast  iron  caps,  pintels  and  base  plates  and  also  be  arranged 
in  such  a manner  as  to  be  self-releasing.  Where  iron  columns, 
girders  and  beams  are  used  they  should  be  protected  by  fire- 
proof covering  of  Portland  cement  concrete,  not  less  than  two 
and  one-half  inches  thick  at  any  point,  or  well  burnt  terra 


i6o 


YALE  INSURANCE  LECTURES. 


cotta,  fire  clay  hollow  tile  of  not  less  than  three  inches  thick, 
and  all  joints  thoroughly  filled  with  Portland  cement  mortar. 
Timbers  entering  party  walls  from  opposite  sides  should  have 
the  ends  separated  by  at  least  eight  inches  of  brickwork.  A 
compromise  construction,  consisting  of  built-up  timbers  of 
small  dimension,  bolted  together  with  washers  placed  between 
the  timbers  to  prevent  dry  rot  occurring  in  the  timber,  has 
not  proven  satisfactory,  as  there  is  more  surface  exposed 
to  the  flames,  and  fire  in  these  crevices  cannot  be  reached 
by  streams. 

Floors.  In  the  construction  of  floors,  we  have  one  of  the 
most  important  features  of  the  slow-burning  building,  and,  if 
properly  built,  the  floors  will  retard  fire  for  a considerable 
length  of  time.  They  should  be  solid,  without  any  openings, 
and,  as  the  ceilings  are  open  and  smooth,  effective  service 
from  hose  streams  may  be  obtained,  providing  the  building  is 
not  of  excessive  area  and  height.  Floors  should  be  double, 
the  under  floor  of  plank,  the  upper  floor  of  hardwood  at  least 
seven-eighths  of  an  inch  thick,  tongue  and  grooved.  Floors 
should  be  laid  directly  upon  the  beams  or  girders.  The  under 
or  heavy  floor  plank  should  be  planed  on  the  exposed  sur- 
face, splined  or  tongue  and  grooved,  and  at  least  two  and 
three-fourths  inches  thick.  For  bays  exceeding  eight  feet, 
the  thickness  of  the  plank  should  be  increased.  Between  two 
floors  two  thicknesses  of  asbestos  paper  should  be  laid,  care 
being  taken  to  break  joints,  and  paper  should  be  turned  up 
at  least  three  inches  at  walls  and  secured  in  place  by  two 
inch  moulding,  nailed  to  floor.  Ordinary  roofing  paper  has 
been  used  to  some  extent,  with  an  attempt  to  make  the  floor 
water-tight.  Roofing  paper  is  of  little  service,  as  it  becomes 
torn  through  the  shrinkage  of  the  planks.  It  is  neither  water- 
tight, nor  does  it  act  as  a fire  retardent.  The  floors  may  be 
arranged  to  drain,  by  sloping  them  toward  scuppers  arranged 


YALE  INSURANCE  LECTURES.  l6l 

in  walls.  The  scupper  should  be  placed  about  two  inches 
below  the  level  of  the  floor.  Openings  in  the  floors  for  steam 
and  all  other  pipes,  to  prevent  water  from  passing  through 
openings  made  for  pipe,  should  be  provided  with  wrought  or 
cast  iron  thimbles  made  water-tight  at  the  floor,  and  extending 
three  inches  above  it.  No  openings  should  be  made  through 
floors  for  elevator  ropes  or  belts,  but  they  should  be  enclosed 
within  the  brick  walls  of  elevator  shaft.  Woodwork  should 
not  be  painted  or  varnished.  Fireproof  paint  for  the  under 
side  of  the  floors  may  be  used,  but  it  is  preferable  not  to 
paint  the  heavy  woodwork  until  it  has  been  up  for  some  time 
and  becomes  dry. 

Roof.  The  roof  should  be  constructed  of  plank  and  beam; 
plank  to  be  tongue  and  grooved  or  splined  and  not  less  than 
two  and  three-fourths  inches  thick  and  planed  upon  the  under 
side  and  covered  externally  with  metal,  composition  or  tile. 
A very  acceptable  roof  is  constructed  of  two  thicknesses  of 
asbestos  paper  laid  directly  upon  the  top  of  roof  planks,  one 
thickness  of  roofing  felt  upon  the  asbestos  paper  and  the 
roofing  felt  covered  with  tar  and  gravel.  A roof  constructed 
in  this  manner  will  hold  a fire  from  within  the  building  until 
the  upper  part  of  the  building  is  nearly  destroyed,  lessening  the 
chances  of  ignition  of  exposed  buildings. 

In  all  structures  constructed  upon  roof,  adjoining  outside  or 
division  walls,  the  walls  should  be  carried  up  as  fire  walls  at 
least  thirty  inches  above  the  roof  of  such  structures,  and,  if  the 
other  enclosing  walls  are  not  wholly  of  incombustible  material, 
the  walls  should  be  extended  at  least  thirty  inches  beyond 
such  intersecting  wall.  All  other  roof  structures  should  be 
constructed  of  three-inch  plank  covered  on  the  outside  with 
metal  or  tile.  Sash,  if  required,  should  be  of  approved  sheet 
metal  and  wire  glass. 

Cornice.  Cornice  should  be  of  brick,  terra  cotta  or  metal 
on  metal  brackets.  No  roof  timbers  should  enter  the  cor- 


II 


1 62 


YALE  INSURANCE  LECTURES. 


nice,  or  be  used  for  the  support  of  cornice.  The  parapet  wall 
should  be  built  out,  to  cut  off  cornice  from  any  adjoining 
building. 

Stairways  and  Elevators.  Stairways  and  elevators  should 
be  enclosed  with  walls  of  brick  or  Portland  cement  concrete 
and,  where  used  as  bearing  walls,  they  should  be  of  standard 
thickness  for  their  height;  non-bearing  walls  may  be  four 
inches  less  in  thickness,  but  no  wall  should  be  less  than  thir- 
teen inches.  Portland  cement  concrete  walls,  when  reinforced 
with  steel,  or  iron  columns  and  beams,  of  sufficient  strength 
to  carry  floors  and  their  loads,  should  be  not  less  than  twelve 
inches  thick.  All  steel  and  iron  should  be  protected  with,  at 
least,  two  and  one-half  inches  of  concrete.  Walls  should 
extend  at  least  three  feet  above  the  roof.  All  doors  opening 
into  the  shaft  should  be  protected  by  standard,  automatic 
metal  clad  fire  doors.  Rolling  steel  shutters  have  been  used 
to  some  extent  for  the  protection  of  these  openings,  but  this 
class  of  shutter  is  not  reliable,  cannot  be  closed  quickly,  is 
difficult  to  repair  and  is  not  to  be  recommended.  Doorways 
into  shaft  should  have  iron  or  concrete  sills,  and  the  sills 
should  be  sufficient  in  width  to  cover  bottom  of  door  and  full 
thickness  of  wall.  Stairs  in  shaft  should  be  of  incombustible 
material.  The  bottom  of  stair  shafts  is  used  at  times  for  gen- 
eral storage,  and,  if  the  stairs  in  shafts  are  constructed  of 
wood,  a fire  at  the  base  of  shaft  would  extend  to  the  top 
and,  possibly,  communicate  with  the  various  floors  of  building. 
The  elevator  shaft  should  extend  three  feet  below  basement 
floor  level,  and  should  be  provided  with  adequate  drainage  con- 
nected with  the  sewer.  Roof  for  shaft  should  be  provided 
with  skylights  with  one-fourth  inch  rib  glass  protected  with 
wire  netting  placed  directly  over  elevator.  The  elevator  shaft 
should  not  be  obstructed  at  the  top  by  solid  floors  or  platforms 
for  the  support  of  elevator  motors  or  machinery;  if  extend- 


YALE  INSURANCE  LECTURES. 


163 


ing  over  shaft,  floor  should  be  of  open  lattice  work,  permitting 
the  free  discharge  of  smoke  through  skylight  in  case  of  fire. 
Dumb  waiters  should  be  enclosed  within  fireproof  shafts,  con- 
structed of  Portland  cement  concrete  and  steel  not  less  than 
four  inches  thick.  All  openings  into  shaft  should  be  protected 
with  automatic  fire  doors. 

Interior  Finish . All  partitions  dividing  a floor  into  com- 
partments should  be  of  brick,  tile,  terra  cotta,  or  iron  studding, 
with  iron  lath  and  plaster;  no  wood  studding,  lath  or  furring, 
or  enclosed  raceways  enclosing  wires  or  pipes  should  be  per- 
mitted, and  wainscoting,  if  used,  should  be  attached  directly 
upon  the  wall  and  should  have  no  hollow  space  behind  it. 

Exterior  Openings.  Openings  in  exterior  walls  should  be 
as  few  and  small  as  possible  and  be  protected  with  standard 
coverings.  The  openings  for  windows  on  street  side  should 
not  exceed  60  per  cent,  of  the  wall  area  and  the  openings 
for  windows  on  sides  exposed  should  not  exceed  30  per  cent, 
of  the  wall  area.  Windows  and  door  sills  should  be  stone, 
iron  or  other  incombustible  material,  and  the  sills  should  be  of 
an  equal  thickness  with  the  wall  and  project  sufficiently  to 
cover  bottom  of  fire  shutters.  This  is  of  importance  as,  in 
many  cases,  shutters  do  not  fit  sufficiently  close  to  the  walls 
to  exclude  flame  from  an  exposing  building.  The  exposure 
of  openings  overlooking  alleys  and  roofs  of  adjoining  build- 
ings is  very  severe  and  these  openings  should  be  protected 
in  a substantial  manner  with  standard  metal  clad  fire  shutters, 
fitting  closely  to  wall,  or  by  standard  metal  frames  and  sash 
with  wire  glass.  Sheet  metal  shutters  warp  easily  under  heat, 
convey  fire  to  interior  or  building  through  radiation  and  have 
not  given  satisfaction. 

Openings  in  Party  or  Division  Walls.  Openings  through 
party  or  division  walls  into  adjoining  building  should  be  pro- 
vided with  double,  metal  clad,  automatic  fire  doors,  and  all 


164 


YALE  INSURANCE  LECTURES. 


shaft  and  belt  holes  should  be  made  as  small  as  possible  by- 
being  bricked  up  or  by  being  provided  with  double,  metal 
clad  fire  shutters  or  metal  hoods.  It  is  impossible  to  thor- 
oughly cut  off  spouts  and  conveyers,  and  their  passage  through 
division  walls  should  be  prevented,  if  possible. 

Boiler  Rooms.  Boilers  should  be  located  in  fireproof  com- 
partments, walls  constructed  of  brick  of  at  least  thirteen  inches 
in  thickness.  Ceiling  should  be  constructed  of  cinder  concrete, 
tile,  or  be  of  brick  arch  construction.  All  openings  into  build- 
ings should  be  protected  with  standard  automatic  fire  doors. 
A nine-inch  brick  wall  is  of  insufficient  strength  to  perma- 
nently support  the  weight  of  fire  doors.  Breeching  of  boiler 
should  connect  to  a brick  stack,  and  not  to  metal  smoke  stack, 
arranged  outside  of  external  wall.  The  boiler  room  should 
be  of  sufficient  area,  preventing  the  crowding  of  contents. 

Area.  The  height  of  buildings,  unless  of  fireproof  construc- 
tion and  intended  to  be  occupied  for  office  or  hotel  purposes, 
should  not  exceed  the  height  available  by  the  local  fire  depart- 
ment. The  highest  apparatus  used  by  fire  departments  for 
elevating  hose  nozzles  are  extension  trucks,  and  these  trucks 
are  made  to  a height  of  seventy-five  feet,  and  so  arranged  that 
hose  nozzles  may  be  operated  at  the  top  of  ladder.  Only  very 
large  cities  have  sufficient  of  these  trucks  to  place  a number 
of  streams  in  operation.  Hose  streams  operated  from  the 
ground  level  to  the  upper  stories  of  a building  are  not  effec- 
tive, as  the  water  is  thrown  but  a short  distance  within  the 
building  to  the  ceiling,  falling  upon  the  floor,  leaving  the 
center  of  the  building  unprotected.  In  large  cities  having 
first-class  fire  departments,  buildings  should  not  exceed  five 
stories  in  height.  Unless  the  building  is  protected  with  auto- 
matic sprinklers,  the  area  of  the  building  should  not  exceed 
5,000  square  feet.  Buildings  of  larger  area  should  be  sub- 
divided by  division  walls,  communicating  through  openings 


YALE  INSURANCE  LECTURES.  165 

provided  with  automatic  fire  doors.  Buildings  of  very  large 
area  filled  with  combustible  stock,  stock  at  times  piled  to 
ceilings  and  in  a manner  that  prevents  sending  streams  to 
center  of  floors,  are  not  safe  when  of  any  known  construc- 
tion, as  fires  occurring  can  not  be  extinguished  and  the  heat 
will  be  sufficient  possibly  to  destroy  the  building. 

“Fireproof”  Construction.  Buildings  of  this  type  differ 
from  the  slow-burning  building  in  the  construction  of  the 
floors  and  roofs,  the  floors  and  roof  being  constructed  wholly 
of  non-combustible  material  such  as  cinder  concrete,  tile  or 
brick,  supported  by  protected  steel  work.  In  the  skeleton  type 
of  fireproof  construction  the  entire  load  is  carried  by  a framing 
of  steel,  all  exterior  columns  being  protected  by  fireproofing 
of  sufficient  thickness  to  protect  the  steel  work.  While  the 
building  may  be  constructed  wholly  of  non-combustible  ma- 
terial, the  interior,  if  filled  with  inflammable  material,  thor- 
oughly afire,  would  be  likely  to  cause  a total  or  a partial 
destruction.  Buildings  of  this  type  are  superior  to  slow-burn- 
ing buildings  on  account  of  there  being  no  combustible  material 
used  in  their  construction,  but  it  is  necessary  that  all  steel 
framing  for  floors  and  all  columns  supporting  the  floors,  be 
properly  protected  with  tile,  terra  cotta,  brick  or  concrete  of 
sufficient  thickness  to  thoroughly  protect  them  from  excessive 
heat.  Vertical  openings  through  floors  of  buildings  of  this 
type  are  just  as  objectionable  as  in  buildings  of  slow-burning 
construction,  and  all  elevators,  stairs,  etc.,  should  be  enclosed 
with  brick  shafts  with  openings  communicating  with  each 
floor  protected  by  automatic  fire  doors.  The  cost  of  buildings 
of  this  type  is  about  20  per  cent,  more  than  the  cost  of 
buildings  of  slow-burning  construction,  and  the  difference  in 
rate  of  insurance  is  such  that  it  is  a very  excellent  investment 
for  prospective  builders  to  erect  buildings  of  this  type,  and  they 
are  coming  into  more  general  use. 


1 66 


YALE  INSURANCE  LECTURES. 


Fire  Doors.  The  best  fire  door  is  the  wood,  tin-clad  door, 
hung  upon  a rail  which  is  fastened  to  the  wall  on  an  incline 
and  so  arranged  with  fusible  link  that  upon  the  melting  of 
the  fuse  the  door  will  automatically  close.  This  automatic 
arrangement  should  not  be  such  as  to  prevent  the  doors  from 
being  closed  by  hand  when  the  openings  are  not  in  use,  and 
the  doors  should  be  operated  daily.  If  allowed  to  stand  open 
the  doors  become  blocked  with  stock,  and  cleated  open  at  the 
floor,  and  pulleys  supporting  door  are  apt  to  stick  on  rail. 
Wood  tin-clad  doors  not  exceeding  forty-eight  square  feet 
should  be  made  of  two  thicknesses  of  well-seasoned  white  pine 
of  at  least  seven-eighths  inch  thickness  each;  one  layer  to 
be  vertical,  and  the  other  layer  to  be  at  right  angles ; layers 
securely  fastened  together  by  wrought  iron  clinch  nails.  The 
doors  should  be  thoroughly  covered  upon  all  sides  and  edges 
with  heavy  tin  plates  not  exceeding  14  x 20  inches  in  size, 
and  all  joints  locked  and  nailed  under  seams.  The  door 
should  be  of  sufficient  area  to  cover  the  opening,  which  it  is 
intended  to  protect,  two  inches  upon  all  sides  and  top.  Doors 
exceeding  forty-eight  square  feet  of  area  should  be  con- 
structed of  three  thicknesses  of  seven-eighth  inch  white  pine 
placed  together  and  covered  as  described  above.  The  value 
of  the  door  will  depend  upon  the  quality  of  the  tin  and  the 
manner  in  which  the  joints  have  been  made,  as  the  covering 
must  be  sufficiently  tight  to  exclude  oxygen,  preventing  com- 
bustion of  the  woodwork.  Hardware  for  fire  doors  should 
be  of  wrought  iron,  as  cast  iron  fractures  upon  application  of 
water  when  heated.  Fire  doors  constructed  wholly  of  iron 
or  steel  warp  under  heat,  carry  fire  through  the  openings  they 
are  intended  to  protect  by  radiation,  are  not  easily  repaired, 
and  have  given  very  poor  satisfaction. 

Electric  Wiring  for  Light  and  Power.  Electric  lights, 
both  incandescent  and  arc,  are  in  general  use  and  afford  the 


YALE  INSURANCE  LECTURES. 


167 


safest  and  most  convenient  means  of  furnishing  light  and 
power  at  the  present  time,  when  the  wiring  is  properly  installed 
and  maintained  in  good  condition.  There  being  no  concealed 
spaces  in  buildings  of  slow-burning  construction,  the  wires 
are  supported  upon  the  ceilings  and  walls  in  plain  view,  where 
any  existing  defects  may  be  discovered  and  remedied. 

Where  the  circuits  are  supported  upon  the  ceilings  they 
should  follow  the  contour  of  the  beams  and  be  securely 
fastened  thereto,  by  sufficient  porcelain  cleats  to  securely  hold 
them  in  place.  Wires  supported  in  this  manner  will  remain 
in  position  and  do  not  disfigure  the  ceiling.  Wires  supported 
from  beam  to  beam  sag  and  loosen  at  supports,  and,  within 
a short  time  after  installation,  hang  in  loops  and  easily  become 
crossed.  Insecure  fastenings,  loose  connections  in  joints, 
switches  and  cutouts,  are  responsible  for  most  of  the  fires 
caused  by  electricity. 

The  wires,  switches  and  cutouts  should  be  of  ample  capacity ; 
the  switches  and  cutouts  constructed  of  non-combustible 
material;  all  connections  well  and  securely  made  and  circuits 
protected  by  proper  sized  fuses.  Fuse  metal,  if  properly  pro- 
portioned, melts  at  a less  temperature  than  the  copper  of  the 
circuit,  interrupting  the  flow  of  current  upon  a short  circuit 
or  excessive  flow  of  current,  when  occurring  from  imperfect 
insulation,  causing  leaks  to  occur  or  overloading  of  the  circuit 
above  the  capacity  of  the  wire.  The  over-fusing  of  a cutout 
is  similar  to  the  over-weighting  of  a safety  valve  upon  a steam 
boiler.  The'  probable  result  would  not  be  as  disastrous  in 
the  electrical  installations  as  in  the  boiler  installation,  but  the 
over-fusing  of  the  cutout  would  as  surely  cause  fire  to  occur 
in  the  event  of  a short  circuit.  All  fuse  metal  should  be 
properly  enclosed,  preventing  the  ignition  of  combustible 
material  nearby  from  the  blowing  of  the  fuse. 

Protection.  Results  have  shown  that  very  excellent  pro- 
tection may  be  expected  from  automatic  sprinkler  service  in 


i68 


YALE  INSURANCE  LECTURES. 


buildings  of  slow-burning  and  fireproof  construction,  and, 
where  buildings  of  these  classes  are  protected  with  sprinkler 
equipments,  the  area  of  the  buildings  is  not  of  so  much  con- 
sequence. An  automatic  sprinkler  equipment  consists  of  an 
arrangement  of  pipes  regularly  spaced  under  all  ceilings  and 
extending  to  all  closets,  rooms,  under  benches  and  all  con- 
cealed spaces  with  automatic  sprinkler  heads  or  valves 
attached;  the  system  of  piping  being  supplied  automatically 
with  water  from  elevated  tanks,  pressure  tanks,  city  connec- 
tions or  pumps.  Two  of  any  of  the  above  sources  of  supplies 
being  necessary  for  standard  equipments  and  in  cities  having 
fire  departments,  steamer  connections  are  attached  to  the 
equipment  in  such  manner  that  the  fire  department  may  pump 
directly  into  the  system,  reinforcing  the  supplies.  There  are 
two  kinds  of  equipments — wet  pipe  systems  in  which  the  pipes 
are  continuously  filled  with  water,  and  dry  pipe  systems,  the 
pipes  of  which  are  filled  with  air  as  far  as  the  automatic 
valve,  which  is  held  closed  by  the  pressure  of  the  air.  In 
buildings  where  the  temperature  is  such  that  the  water  in  the 
pipes  would  be  apt  to  freeze,  dry  systems  are  installed.  Wet 
systems  are  preferable  as  their  operation  is  more  prompt,  and 
there  is  less  opportunity  for  this  class  of  equipment  to  become 
disarranged,  as  there  is  no  obstruction  to  the  flow  of  water, 
when  the  main  valve  is  open,  but  the  sprinkler  heads.  The 
sprinkler  heads,  or  valves,  are  sealed  close  with  fusible  solder 
melting  at  temperatures  ranging  from  165  to  360  degrees, 
the  desired  sprinkler  being  determined  by  the  temperature 
of  the  place  in  which  the  sprinkler  is  to  be  located;  dry 
rooms,  ceilings  directly  above  furnaces,  etc.,  requiring  sprink- 
lers which  open  at  a higher  temperature  than  would  be 
required  in  ordinary  mercantile  risks.  On  account  of  smooth 
ceilings  and  absence  of  vertical  openings  through  floors  and 
concealed  spaces  at  walls,  sprinkler  protection  in  buildings  of 


YALE  INSURANCE  LECTURES. 


169 


slow-burning  and  fireproof  construction  is  more  effective  than 
in  buildings  of  joist  construction.  In  joist  construction,  the 
space  between  the  joists  is,  to  some  extent,  out  of  reach  of 
the  distribution  from  the  sprinkler  heads,  and  fire  obtaining 
headway  in  these  spaces  must  be  extinguished  by  hand. 
Sprinkler  heads  should  be  so  located  as  to  protect  all  parts 
of  the  premises.  The  number  and  spacing  of  sprinkler  heads 
is  determined  by  the  construction  of  the  ceiling  and  class 
of  stock  contained  in  building.  Under  open  joisted  construc- 
tion the  pipes  should  be  run  at  right  angle  to  joists,  not  more 
than  ten  feet  apart,  and  sprinkler  heads  placed  not  to  exceed 
eight  feet  apart  on  pipes  and  the  sprinkler  heads  staggered — 
that  is,  the  sprinkler  heads  be  so  located  as  to  distribute 
water  into  alternate  joist  channel  ways.  In  sprinkler  pro- 
tection the  most  important  question  is  that  of  supplies.  An 
equipment,  if  installed  in  the  most  approved  manner,  unless 
with  adequate  supplies  cannot  possibly  render  as  good  service 
as  an  inferior  equipment  with  good  supplies. 

Two  sources  of  supply  are  necessary,  to  lessen  the  chances 
of  a water  shortage  in  time  of  fire.  One  of  the  supplies 
should  furnish  water  under  a heavy  pressure,  that  the  first 
sprinklers  opened  may  be  as  effective  as  possible. 

Public  water  works,  having  adequate  sized  mains  and 
providing  a continuous  heavy  pressure,  are  most  desirable. 
Next  in  value  are  pressure  tanks  which  furnish  an  excellent 
primary  supply,  especially  in  connection  with  wet  pipe  sprink- 
ler service.  Pressure  tanks  are  not  so  effective  for  dry  pipe 
sprinkler  service,  as  much  of  the  initial  discharge  is  consumed, 
in  filling  of  the  empty  pipes.  The  tanks  should  not  be  placed 
below  the  top  floor,  and  better  service  is  obtained  if  located 
upon  the  roof,  as  less  air  pressure  would  be  necessary  to  expel 
all  of  the  water  under  good  pressure,  the  tank  being  above* 
all  of  the  sprinkler  heads.  Pressure  tanks  are  cylindrical  in 


170  YALE  INSURANCE  LECTURES. 

shape,  constructed  of  steel,  air-tight,  and  the  size  of  the  tank 
generally  used  is  sixty-six  inches  in  diameter  and  twenty-five 
inches  in  length ; total  capacity,  4,500  gallons ; water  capacity, 
3,000  gallons ; two-thirds  of  the  tank  containing  water  and  the 
remainder  filled  with  air  under  pressure. 

The  number  of  tanks  necessary  depends  upon  the  number 
of  sprinkler  heads  per  floor,  and,  if  the  tank  supply  is  of  a 
capacity  to  supply  20  per  cent,  of  the  sprinkler  heads  upon 
the  floor  having  the  greatest  number,  allowing  200  gallons 
of  water  per  head,  the  supply  will  be  considered  sufficient.  No 
tank,  however,  should  be  of  less  than  4,500  gallon  capacity. 

Gravity  Tanks.  Greater  quantities  of  water  may  be  stored 
in  gravity  tanks,  as  no  air  space  is  required.  The  tanks  should 
be  of  a capacity  sufficient  to  provide  5,000  gallons  for  each 
100  sprinkler  heads  upon  the  floor  having  the  greatest  number. 

The  pressure  of  the  water  delivered  from  gravity  tanks  is 
wholly  dependent  upon  the  height  of  the  tank  above  the 
highest  sprinkler  heads,  and  the  tank  should  be  elevated  as 
high  as  possible.  The  bottom  of  the  tank  should  not  be  less 
than  fifteen  feet  above  the  highest  sprinkler  heads. 

Gravity  tank  supply  should  not  be  used  as  a primary  source, 
as  the  pressure,  dependent  upon  the  length  and  size  of  pipe, 
fittings  and  deposits,  is  often  insufficient  to  discharge  the  water 
into  ceilings,  but  will  answer  very  well  to  wet  all  material 
below  the  sprinkler  heads. 

Pumps.  Pumps  as  a source  of  supply  for  sprinkler  service 
are  less  desirable  than  any  of  the  supplies  referred  to  above, 
due  to  their  liability  of  being  out  of  order  through  disuse,  lack 
of  care,  and  on  account  of  their  limited  supply  while  in 
operation. 

When  installed,  Standard  Underwriter  pumps  should  be 
used.  They  differ  from  the  ordinary  trade  pump  in  being 
constructed  of  greater  strength  to  withstand  excessive  strain; 


YALE  INSURANCE  LECTURES. 


171 


the  steam  and  water  passages  are  of  greater  area;  and  the 
plungers,  piston  and  valve  rods  and  lining  of  stuffing  boxes 
are  constructed  of  non-corrosive  metal,  preventing  as  far  as 
possible  the  disability  of  the  pump  from  rust. 

The  pump  should  be  provided  with  automatic  steam  valve, 
adjusted  to  maintain  a continuous  high  pressure.  Where 
pump  is  intended  for  primary  service,  recording  steam  gauge 
should  be  provided. 

Automatic  Sprinkler  Alarm.  Sprinkler  equipments  are 
provided  with  an  automatic  alarm  arrangement,  which  sounds 
a warning  when  the  water  within  the“pipe  is  set  in  motion, 
caused  by  the  opening  of  a sprinkler  head,  or  pipe,  by  accident 
or  fire.  When  kept  in  proper  order,  too  much  importance  can 
not  be  placed  upon  the  alarm,  as  serious  water  loss  may  result 
from  a small  fire,  which  the  sprinklers  extinguish,  if  the  flow 
of  water  is  not  checked.  Several  severe  losses  have  occurred 
in  this  manner. 

Outside  Sprinklers.  For  the  protection  of  cornices,  struc- 
tures on  roofs,  and  openings  in  exposed  walls,  a well  designed 
system  of  outside  sprinklers  affords  the  best  protection. 

The  supply  should  never  be  taken  from  the  supplies  pro- 
vided for  an  automatic  sprinkler  system,  but  from  independent 
connections  from  stand  pipes  or  city  water  works.  Where  the 
local  fire  department  can  be  induced  to  attach  to  the  equip- 
ment, steamer  connections  should  be  added.  Open  automatic 
sprinklers  are  not  acceptable  for  this  use.  Specially  arranged 
sprinkler  heads  discharging  the  water  against  the  building 
have  been  designed. 

The  piping  should  be  adequate,  as  all  of  the  sprinklers  are 
to  be  operated  at  one  time,  discharging  a considerable  amount 
of  water. 

The  equipment  should  be  provided  with  a separate  riser 
for  each  two  floors,  all  risers  connecting  with  a main  on  the 


172 


YALE  INSURANCE  LECTURES. 


lower  floor,  through  cut  off  valves.  The  risers  should  pass 
through  the  floors,  and  short  extensions  from  the  cross  mains 
project  through  lintel  of  each  window  frame,  to  the  exterior 
part  of  frame.  One  sprinkler  head  at  each  opening  is  suffi- 
cient to  protect  windows  not  exceeding  four  inches  in  width. 

For  the  protection  of  cornices,  the  sprinkler  heads  should 
be  spaced  six  feet  apart. 

High  Pressure  Service.  For  the  protection  of  congested 
districts  in  large  cities,  exposed  to  sweeping  conflagration,  a 
system  of  high  pressure  service  supplied  by  a sufficient  number 
of  stationary  pumps,  i$  far  in  advance  of  the  present  method 
of  reinforcing  the  pressure  from  water  works  with  steam  fire 
engines. 

The  great  height  to  which  buildings  are  now  erected,  narrow 
alleys  and  streets,  unprotected  openings  of  buildings,  increase 
the  conflagration  hazard  to  a considerable  extent,  and  the 
present  method  of  supplying  hose  streams  from  steam  fire 
engines  is  slow  and  inadequate. 

A very  excellent  high  pressure  system,  such  as  has  been 
referred  to  above,  has  been  installed  for  the  protection  of  the 
buildings  of  the  Louisiana  Purchase  Exposition,  and,  while  a 
number  of  fire  engines  will  be  kept  upon  the  grounds,  it  is 
not  intended  to  use  them,  except  for  pumping  into  some  of 
the  sprinkler  systems  which  will  be  installed. 

Hose  connections  will  be  made  directly  to  fire  plugs  and 
continuous  pressure  maintained  in  system  by  stationary  steam 
pumps  provided  with  automatic  valves. 

The  mains  are  of  extra  strength  of  wrought  iron  pipe 
and  ends  connected  together  with  threaded  couplings. 

All  exterior  mains  are  laid  in  the  earth  below  the  frost  line 
and  tested  to  300  pounds  per  square  inch  after  installation. 

The  trunk  lines  consist  of  three  twelve-inch  pipes,  extend- 
ing the  full  length  of  the  grounds,  and  these  lines  are  cross 


YALE  INSURANCE  LECTURES. 


*73 


connected  with  eight-inch,  ten-inch,  and  twelve-inch  pipes 
between  each  two  buildings,  each  connection  being  provided 
with  a cut-off  valve  enabling  any  section  to  be  disconnected, 
in  the  event  of  a break,  without  disabling  the  service. 

Two  six-inch  feed  pipes  connect  with  four-inch  circulating 
mains  in  each  building,  supplying  the  interior  fire  hydrants. 
Extensions  are  taken  from  the  four-inch  circulating  mains  to 
roofs  of  buildings  and  supply  numerous  hose  connections. 

A sufficient  number  of  three-inch  deck  turret  nozzles,  con- 
nected with  the  underground  mains  by  six-inch  connections, 
are  located  upon  platforms  in  the  main  buildings,  to  discharge 
water  over  the  interior  of  the  building  in  the  event  of  serious 
fire. 

For  exterior  protection  three  way,  self-draining  hydrants 
are  placed  one  hundred  and  fifty  feet  apart,  and  about  one 
hundred  feet  distant  from  buildings.  The  hydrants  are  suffi- 
ciently close  to  avoid  the  necessity  of  running  long  lines  of 
hose,  thereby  reducing  the  pressure  through  resistance. 

First  class  two  and  five-eighths  inch  fire  hose  is  expensive. 
A fifty-foot  section  of  the  best  hose  costs  more  than  a 
hydrant.  The  deterioration  of  hose  is  greater  than  that  of 
a hydrant,  and  it  is  economy  to  install  hydrants  in  sufficient 
number  that  less  hose  be  required. 

The  water  supplies  will  consist  of  fourteen  Worthington 
“Underwriter”  pumps,  of  one  thousand  gallons  capacity  each, 
taking  water,  through  a twenty-four  inch  suction  pipe,  from  a 
reservoir  of  six  million  gallons  capacity,  and  discharging  into 
the  system  of  pipes  through  a twenty-inch  main. 

The  elevation  of  the  reservoir  is  above  that  of  the  pumps, 
and  the  water  is  delivered  to  the  pumps  under  about  five 
pounds  pressure. 

The  system  is  also  connected  to  the  city  water  works  service, 
through  several  connections  to  twelve  and  thirty-six  inch  pipe, 


i74 


YALE  INSURANCE  LECTURES. 


furnishing  a supply  from  this  source  under  pressure  from 
ninety  to  ninety-five  pounds. 

These  connections  are  provided  with  check  valves,  pre- 
venting the  pump  pressure,  which  is  the  greatest,  from  passing 
into  the  city  pipes;  if  the  demand  exceeds  the  capacity  of  the 
pumping  plant,  the  check  valves  will  open  automatically. 

A separate  system  for  domestic  service  has  been  provided, 
and  the  high  service  system  will  be  used  for  fire  protection 
exclusively.  The  pumps  are  located  in  a fireproof  building, 
which  is  also  to  be  occupied  as  a boiler  house.  The  building 
is  exposed  by  the  machinery  building,  one  hundred  feet 
distant.  The  exposed  wall  is  to  be  protected  with  outside 
sprinklers. 

Sufficient  boiler  capacity  will  be  furnished  and  each  pump 
is  provided  with  independent  supply  and  exhaust  pipes,  the 
supply  pipes  connecting  with  a steam  main  connected  to  inde- 
pendent batteries  of  boilers. 

Fire  Hose.  At  present  29,000  feet  of  two  and  five-eighths 
inches  cotton,  double  jacket,  rubber  lined  hose,  for  outside 
hydrant  use,  has  been  provided,  three  feet  samples  of  this  hose, 
before  purchase,  passing  the  test  for  strength  required  by 
the  National  Board  of  Underwriters.  This  test  requires,  in 
three  feet  lengths,  bursting  pressure  to  average  not  less  than: 

When  straight  500  lbs. 

When  curved,  radius  two  and  quarter  feet  500  “ 

Ends  tied  together,  sharp  kink  in  center 300  " 

Most  samples  leaked  or  burst  when  subjected  to  the  curve 
test.  The  above  requirements  are  more  severe  than  needed 
for  private  fire  protection  service,  but,  as  the  hose  tested  was 
of  the  kind  sold  and  generally  used  by  public  fire  departments 
where  wear  and  tear  is  considerable  and  heavy  pressure  fre- 


YALE  INSURANCE  LECTURES.  I 75 

quently  carried  upon  the  hose,  due  to  long  lines  kinks  and 
curves,  the  test  for  strength  should  necessarily  be  severe. 

Some  of  the  samples  of  hose  tested  showed  an  excessive 
twist  under  pressure,  sufficient,  in  a length  of  fifty  feet,  to 
loosen  the  couplings  and  cause  leaks. 

Hose  should  show  little  tendency  to  twist,  and  the  twist 
should  be  in  the  direction  to  tighten  and  not  to  loosen  the 
coupling. 

Cheap  hose  is  a disappointment,  and  the  most  expensive  in 
the  end.  Many  fires  have  gotten  beyond  control  on  account 
of  the  bursting  of  hose  just  at  the  time  when  most  needed, 
and  the  hose  provided  for  use  in  the  public  fire  departments 
should  be  of  the  very  best. 

For  the  protection  of  the  interior  of  the  buildings,  hydrants 
are  placed  one  hundred  and  fifty  feet  apart.  One  and  one-half 
inch  hose  is  provided  for  these  hydrants  and  hose  connections 
on  roof,  as  it  is  believed  that  hose  of  this  size  can  be  more 
quickly  handled  and  placed  in  service. 

The  hose  connections  of  the  interior  hydrants  are  bushed 
down  for  connection  with  the  one  and  a half  inch  hose  and 
the  heavy  hose  can  be  attached  to  any  of  the  hydrants  by 
removing  the  bushing. 

Fire  Alarm  System.  The  fire  alarm  system  is  to  consist 
of  two  hundred  and  twenty-five  fire  alarm  boxes  distributed 
about  the  various  buildings  and  grounds.  One  hundred  and 
twenty  of  these  boxes  are  now  in  place. 

There  are  two  box  circuits  for  each  building,  and  the  boxes 
will  alternate  on  circuits  so  that  all  of  the  boxes  in  any  one 
building  will  not  be  dependent  upon  one  circuit. 

The  circuits  are  placed  in  a subway  and  protected  from 
* lighting  and  power  wires  and  extend  to  a central  station 
located  in  engine  house  No.  i. 


176 


YALE  INSURANCE  LECTURES. 


Operators,  serving  eight  hours  watch  each,  are  in  attend- 
ance day  and  night,  and  all  alarms  are  received  and  sent  out 
from  this  office. 

The  central  station  is  connected  with  the  city  fire  alarm 
office  by  box  circuits  and  telephones. 

Construction  of  Buildings.  The  buildings,  except  the  Fine 
Art  Buildings,  are  constructed  of  frame,  composition  and 
gravel  roofs,  exterior  walls  covered  with  staff  and  interior 
walls  coated  with  whitewash. 

Where  hollow  walls  occur,  the  hollow  space  is  broken  by 
vertical  and  horizontal  fire  stops,  preventing  any  fire  which 
may  occur  from  spreading  in  walls. 

All  burlap,  bunting  and  other  inflammable  material  used 
for  decoration  will  be  chemically  treated,  preventing  its  rapid 
combustion. 


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UNIVERSITY  OF  ILLINOIS-URBANA 
HG9658.Y34X  C001 

YALE  INSURANCE  LECTURES  NEW  HAVEN 


3 0112  020944184 


